During March, capital markets have faced severe challenges from the conflict between Russia and Ukraine. It has caused sharply higher inflation, notably in energy and food prices, leading to multiple policy rate increases and the likelihood of a faster tightening trajectory by the US Federal Reserve.

Despite this, there has not been a rush to reduce exposure to riskier assets: indeed, emerging market spreads have tightened during the month, and there has been substantial new issue supply during the last two weeks. Similarly, after a dire first quarter, particularly in the US but also on a global basis, the IPO market is showing signs of improvement, with two large IPOs under way at present, seemingly enjoying a favourable response.

From 1.71% on 1 March, the 10-year US Treasury yield rose to 2.51% as of 28 March. The 10-year bonds traded as low as -0.1% in early March, but now (30 March) stands at 0.64%. While two-year bond remain at narrowly negative yields, their yield has risen from -0.75% to -0.02% during the month. This implies that 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). All new debt supply will be priced using significantly higher reference rates, indicating the likelihood of higher borrowing costs across the board even where spreads remain stable.

There has been huge volatility in Russian and Ukrainian spreads. Amidst fears of an early sovereign default, Russia's EMBI+ index, its average reference bond spread over UST, widened from below 300 basis points prior to its invasion of Ukraine to a peak of over 6000 basis points, rallied back to 2197 when payment of pending dollar coupons was first announced, and then widened again to 3705 (24 March) as Russian corporate borrowers faced technical default. It closed on 29 March at 2561. Ukraine's spread widened from 2929 at end-February to 4929 but closed on 29 March at 2280. For both countries, although their spreads eased during March, prevailing margins nevertheless still imply expectations of default and capital loss.

However, the adverse background has not translated into flight from riskier asset classes: emerging markets and other riskier assets have proved resilient:

• Of 19 EM countries 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.
• Nigeria brought this year's first sub-Saharan sovereign supply. It sold USD1.25 billion of seven-year 8.375% debt on 17 March, attracting USD4 billion of peak demand.
• Turkey also sold five-year bonds. With initial price guidance of 8.875% for the sale, it sold USD2 billion at 8.625%, reporting that the deal was three times subscribed, although it paid 7.25% in February to raise USD3 billion of five-year Islamic debt.
• Republic of the Philippines placed a USD2.25 billion three-part dollar-denominated issue which includes its ESG debut, a 25-year USD 1billion bond doubled in size and priced at 4.2%, 50 basis points inside guidance. The combined offering gained over USD8 billion in demand.
• It was followed by Indonesia, which sold USD1.75 billion of 10 and 30-year debt, priced at 3.6% and 4.35%, versus guidance at 3.95% and 4.6%.
• Egypt also raised JPY60 billion - USD500 million equivalent - through a Samurai deal arranged by and enjoying credit enhancement from SMBC, priced at 0.85% for five years.
• There has also been a revival in hybrid and perpetual debt: in the week of 25 March, VW, Bayer, Telia and Intesa Sanpaolo all arranged hybrid or AT1 financings successfully, with Deutsche Bank issuing well-received AT1 on 28 March.

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

By contrast, a sizeable MENA flotation appears to be well-received, and a large Indonesian offering also is progressing favourably. Dubai Electricity and Water Authority announced its flotation on 24 March, the first of ten planned listings for state-owned entities in Dubai. It planned the sale of 3.25 billion shares at AED2.25-2.48 each, to raise up to AED8.06 billion (USD2.19 billion), the largest flotation in Dubai since DP World was floated in 2007. On 28 March, Gulf News reported that the deal was heavily oversubscribed, suggesting that it was likely to be priced at the upper end of its range and even potentially increased. Additionally, the Indonesian IPO for technology firm GoTo was priced on 25 March at IDR338 per share, versus a range of IDR316-346. At this level it is slated to obtain IDR16.2 trillion (USD1.1 billion) in proceeds.

Our take

March obviously has been a difficult month for financial markets, and reference yields have risen sharply to reflect the worsening prospects for inflation, particularly impacting energy and food prices.

Despite this, there are multiple indicators of resilience, notably the tightening of emerging market spreads during the last month and the successful completion of several EM sovereign deals in the last few weeks. There has also been a sizeable supply of corporate hybrid debt in Europe and well-received Additional Tier 1 issues for banks.

First quarter IPO data is dire - from before the Russia/Ukraine conflict - with US supply particularly severely curtailed, and global first quarter IPO sales below 30% of their 2021 level. However, there are some positive recent indicators in this segment as well, notably the apparently positive progress with large IPOs in Dubai and Indonesia, along with other smaller issues.

Overall, while uncertainty remains severe, financial markets in general do not seem to be suffering from lasting dislocation or closure in response to the Russia/Ukraine conflict and the formal start of the rate-tightening cycle in the US.

Posted 30 March 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.