This week's key development has been a rally in stock markets, high yield and emerging market bonds, and rising yields on high-grade sovereign debt, amidst reports of positive progress with a COVID-19 vaccine, with Turkey performing particularly strongly after changing its economic management team: elsewhere the UK has announced plans to become a regular issuer of Green Bonds.

Emerging markets/ High yield

On 9 November, Emerging Market spreads tightened sharply on reports of positive progress with a potential COVID-19 vaccine.

A notably strong performer was Turkey, whose EMBI+ index tightened by 11.1%, falling 69 basis points versus US Treasuries, to an average spread of 552 b.p., its lowest level since mid-June, versus 621 b.p. on 6 June. Its improvement was accompanied by a significant rally in the Turkish lira amidst market hopes that the replacement of its Central Bank governor and Finance Minister would permit use of more orthodox monetary policy. New Governor Naci Ağbal was reported on 9 November by Daily Sabah to have stated that the central bank's main aim would be price stability and that it would "decisively" use available policy tools to achieve this, raising hopes of a rate increase at its next monetary policy meeting on 19 November.

The improved sentiment was reflected by Totalplay Communications, a Mexican telecommunications firm, arranging its pending debut international deal. It sold USD575 million of five-year bonds at 7.5%, the bottom end of initial guidance, with demand reportedly reaching USD1 billion.

This was followed on 10 November by Brazilian steel company CSN, whose CSN Inova unit tapped its 6.75% 2028 issue with USD300 million, priced at a 6.45% yield. Tierra Mojada, a unit of Mexican energy firm Fisterra, announced that it will seek USD904 million of 20-year debt to fund a new power plant in Guadalajara.

In response to the positive sentiment early this week, the Bloomberg Barclays US corporate high yield index fell 45 basis points to 4.56%, a record low for US junk bonds, whose previous floor had been 4.83% in June 2014.

Between 2 and 9 November, the IHS Markit iBoxx High Yield Index for CCC (weakly rated) high yield bonds tightened by 392 basis points in the oil and gas sector, with the consumer and healthcare sectors tightening by 186 and 173 basis points respectively.

ESG: UK to issue Green Bonds

UK Chancellor Rishi Sunak gave a parliamentary speech on 9 November stating that to help the UK meet its 2050 net zero carbon emissions target and other environmental goals the government plans a debut sovereign green bond in 2021, to be followed by a "series of further issuances to meet growing investor demand".

The EU has arranged its second issue to fund its SURE program. It sold EUR14 billion of five and 30-year debt, with EUR6 billion for the longer tenor. Demand was an impressive EUR175 billion, the second largest syndicated bond total behind the EU's EUR233 billion record established last month.

Finnish paper and pulp firm UPM has announced a Green Bond framework and is reportedly planning a Euro-denominated 8-year deal. The program lists six categories for use of proceeds including sustainable forest management, climate-positive products, pollution control and waste management, water and wastewater management, increasing energy efficiency and use of renewable energy.

The Basque Country, one of Spain's 17 autonomous regions, launched a EUR600 million 10-year sustainable bond on 10 November. Pricing was tightened by 4 basis points versus initial guidance after the deal gained EUR2 billion in demand. Proceeds are to be used to "address the exceptional situation caused by COVID-19", focusing on healthcare, education and social policy.

Other debt

According to a Financial Times report, on 6 November the stock of negative yielding debt reached USD17.05 trillion, surpassing the prior record of USD17.04 trillion achieved in August 2019. The stock has more than doubled within 2020, from a low point of around USD8 trillion prior to the announcement of new extraordinary monetary policy measures in March. Just over one-quarter of the total outstanding investment grade market offered negative returns, below the 30% level reached in 2019 given increased corporate and government borrowing levels this year.

Ahead of the European Union's second jumbo sale, the European Financial Stability Facility opened books on 9 November on a EUR1 billion "no-grow" tap of its 0.875% 2035 issue, quickly attracting demand of EUR6.5 billion.

Also on 9 November, Allianz launched a perpetual RT1 deal, with tranches in Euros and US dollars, first callable after 10.4 and 5.4 years respectively. It gained what Global Capital described as "a wall of demand" for the transaction with demand reportedly exceeding EUR3.75 billion and USD3.75 billion respectively.

Bristol Myers Squibb sold a USD7 billion six-tranche package, its second large sale for acquisition purposes within 18 months.

Westpac sold a two-part subordinated deal, with final maturities of 15 and 20 years and pricing of 2.668% and 2.963%. The shorter tranche is first callable after 10 years. The tranches were priced at margins of 175 and 125 basis points respectively, versus initial price talk of spreads of 205 and 160 basis points.

Our take

The apparent resolution of the US presidential election and the announcement of positive progress in trials for a COVID-19 vaccine have led to a general sell-off in sovereign bond markets, and a tightening in spreads for riskier asset classes, with high-yield bonds performing particularly strongly, given hopes of a more-positive economic trajectory.

The revival of Latin American bond supply after weeks of relative activity is a further indicator of the improved appetite for riskier forms of debt.

The political changes in Turkey clearly have been well-received initially but risks remain elevated. A key near-term indicator will be whether policy is changed in Turkey's next monetary policy meeting. From a market perspective, prior adverse sentiment had focused on Turkish inflation - which on 3 November 11, 2020 was reported at an annual rate of 11.89% in October, versus 11.75% in September: the core inflation rate also rose to 11.5%, versus a revised government target of 8.5%. If the policy rate remains stable, the recent tightening in Turkish bond spreads would almost certainly reverse sharply.

Longer-term analysis by our Country Risk team remains cautious, highlighting that Turkey's interest rate policy is deeply established and stems from the views of its president: as such, even if there is a near-term policy compromise to calm market sentiment, its long-term stance is unlikely to alter materially.

The UK's decision to issue Green bonds is a political choice. While Green bond issuance has shown marginal price advantage for many issuers, it is hard to assess that the UK is being driven by cost factors or pushed to broaden its investor base. Instead, the move - as with other European governments this year, such as Germany and Sweden -represents a public statement of political commitment to environmental goals, showing increased government focus on climate objectives. The UK decision also reflects growing pressure from environmentally oriented investors and interest groups to participate in expanding Green Bond finance.

The EU's second SURE issue appears a clear success, despite being launched in a week in which bond yields have risen. Unsurprisingly, demand fell short of the EUR233 billion record for the program's debut offering but was still extremely sizeable. The EU's program will give a significant boost to ESG issuance levels.

A late October release by Climate Bonds Initiative noted that ESG issuance had totaled over USD250 billion in the first half of 2020, versus the USD341 billion for full-year 2019. The report highlighted that within the first half, market composition had changed significantly, with rapid growth in funding for social and pandemic-related purposes. By contrast, first-half 2020 Green Bond sales were under half the 2020 total in all regions barring Latin America, reflecting Chile's expanded issuance, with the European time zone providing a record 55% of aggregate Green issuance.

Green activity subsequently has been boosted by new sovereign supply, notably from Germany, Sweden and Egypt, but this year's ESG growth remains likely to be led by social/pandemic-related issuance. Trade media have flagged that pending supply is likely to include additional issuance by French agencies CADES and Unédic, which have still to cover their expanded 2020 requirements.