The three major themes of the last two weeks have been rising reference yields, debt market resilience and signs of improvement in primary equity markets.

Rising reference yields

Key reference rates in the international bond market have risen further given worsening inflationary expectations and greater projected monetary policy tightening, with the FOMC minutes suggesting Federal Reserve balance sheet reduction at USD95 billion per month, versus a peak USD50 billion reduction in the prior cycle.

From 1.71% on 1 March, the 10-year US Treasury yield rose to 2.6% (6 April). The 10-year Bund traded as low as -0.1% in early March but reached 0.66%. Two-year Bunds remain at narrowly negative yields, but their yield rose from -0.75% to -0.02% during March (and reached -0.01% this week before rallying). The stock of negative yielding debt is rapidly approaching zero (versus USD4.5 trillion at end-February and a late 2020 peak of USD18 trillion). New dollar and Euro-denominated debt supply thus will be priced using significantly higher reference rates, indicating higher borrowing costs even where spreads remain stable. The Wall Street Journal reported that US bond performance - as measured by the Bloomberg US Aggregate bond index - returned minus 6% in 2022 up to 30 March, indicating the largest quarterly loss since 1980.

Market resilience

Rising reference yields have not translated into flight from riskier asset classes. Of 19 EM countries we studied, each of the sample tightened their EMBI+ spreads between end-February and 29 March: as an example Turkey's spread eased from 598 to 523 basis points and Poland's spread fell from 71 to 21 basis points. This aligned with a revival of EM supply with five MENA offerings completed in the week to 1 April.

Nor has the adverse trend undermined corporate supply. According to IFR, the US investment grade bond market recorded its third highest issuance level to date during the first quarter. It attributes this to borrowers accelerating issuance given the tightening stance projected by the Federal Reserve. Using Bloomberg Data, BondEvalue estimated that global corporate issuance reached USD750 billion, 29% higher than the prior quarter, although down 20% on Q1 2021.

The EU tested market appetite for long-dated asset with a "no-grow" EUR6 billion long 20-year Green Bond for its Next Generation EU programme, due on 4 February 2043. The issue showed a healthy "duration bid", gaining an impressive EUR78 billion in demand, pricing at 1.374%, nine basis points over mid-swaps. The EU has now raised EUR99.5 billion for NGEU including eight syndicated transactions: EUR29.5 billion have been in Green Bond format. As a further indicator of appetite for riskier instruments, both Rabobank and Italy's Banco BPM have successfully completed Additional Tier 1 sales, Spanish insurer Mapfre sold a rate Tier 3 deal, and there has been longer-dated Latin American corporate issuance.

Portugal brought the most recent sovereign syndicated supply, a EUR3 billion 10-year deal. The issue was priced at 1.694%, 35 basis points over mid-swaps. Demand reached EUR15.5 billion from over 160 accounts.

Equity

First quarter equity supply fell sharply, but there have been several signs of improvement recently, with a major increase to the first in a series of privatizations in Dubai.

According to Renaissance Capital data for US IPOs, excluding SPACs just eighteen firms raised a total of USD2.1 billion in the first quarter, versus 84 firms that sold USD35 billion of equity in Q4 2021, and 101 firms that had raised USD39.2 billion in Q1 2021. This trend is not restricted to the US market: Latin Finance reported on 28 March that 23 Brazilian firms withdrew planned IPOs this year. According to Bloomberg, global IPO supply reached just USD65 billion in Q1, versus USD219 billion in Q1 2021.

By contrast, a sizeable MENA flotation was very strongly received and increased substantially. Dubai Electricity and Water Authority announced its flotation on 24 March, the first of ten planned listings for state-owned entities in Dubai. Initially it planned the secondary sale by the government of 3.25 billion shares to raise up to AED8.06 billion (USD2.19 billion), the largest flotation in Dubai since DP World was floated in 2007. Domestic cornerstone investors pre-circled the equivalent of USD1.3 billion. The issue, which initially represented 6.5% of the company's share capital, was more than doubled on 30 March, to 8.5 billion shares (17% of DEWA's capital) and was still oversubscribed despite the large increase to raise USD5.7 billion equivalent.

Having delayed its sale of shares in Life Insurance Corporation (LIC), the Indian government placed 1.5% (post greenshoe) of oil and gas producer ONGC, in which it owned a 60.41% majority. The offering raised INR30 billion (USD397 million). It comprised the sale of 9.43 million shares with the option to raise this to 18.86 million shares, which was exercised. On 31 March, the institutional portion was announced to be 3.5 times subscribed.

According to Indian media sources, the Indian government has contacted bankers suggesting that it may launch its planned share sale in Life Insurance Corporation (LIC) in early May, with Moneycontrol News noting that the current approvals for the sale expire on 12 May. Bloomberg reports previously had suggested that the sale would be for 5% of LIC, to raise some INR50 billion (USD6.6 billion) but IFR reported on 6 April that up to 7% might be sold if market conditions and appetite so permit.

China's state-owned energy company CNOOC, currently listed in Hong Kong, issued a prospectus on 30 March announcing plans to sell 2.6 billion shares on 12 April, representing 5.5% of its enlarged capital base. The offering is slated to raise some CNY 35 billion (USD5.5 billion) in connection with CNOOC seeking a Shanghai listing. On the same day, Xinhua agency reported that the China Securities Regulatory Commission had approved the sale of up to 2.99 billion shares, leaving room for a 15% greenshoe facility. CNOOC was forcibly delisted from NYSE last year over alleged ties to the Chinese military.

The firm is benefitting from higher energy prices, forecasting a 62-89% increase in first quarter earnings versus the same period in 2021. For 2021, it reported oil and gas sales of CNY222.1 billion, up 59.1% year-on-year, while net profit rose to a record CNY70.3 billion, a 181.7% increase versus the prior year.

Our take

Overall, markets are showing diverse trends:

• Reference bond yields have adjusted to the deterioration of inflation expectations by undergoing a sizeable downside correction since early March, exacerbated by widespread expectations of tighter central bank actions to seek to stem inflationary pressures. The stock of negative yielding debt has almost entirely been eliminated.
• Despite this, emerging market spreads not only did not widen - a sign of flight from riskier assets - but tightened across a diverse sample of countries in March. There has been encouraging supply of long duration and EM debt and the equity calendar also has shown some promising developments, with DEWA's upsizing representing a relatively unparalleled increase in a major equity sale.

LIC's planned flotation and the large pending CNOOC sale will be important further tests of equity market appetite.

For those operating in India, LIC is also of considerable importance to India's overall budgetary position. For fiscal 2022-23, its government has targeted asset disposals of INR 650 billion (USD8.57 billion). It is reported to have raised INR124.2 billion in fiscal 2021/22, versus a divestment target of INR780 billion, with the shortfall largely attributable to the delayed and downsized sale of LIC. The 2021-22 privatization target originally had been INR1.75 trillion but this was reduced sharply in February 2021: the LIC sale initially had been projected to raise around INR1 trillion (USD13.3 billion).

Posted 07 April 2022 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, S&P Global Market Intelligence

This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.