A report by the Financial Times has revealed that governments in emerging markets are selling foreign currency bonds at a record pace this year, defying rising global interest rates and a resurgent US dollar. Countries are pressing on with borrowing plans to finance the impact of the Iran war, despite higher borrowing costs. This has led to a wave of borrowing worth $10 billion from emerging markets this month.
The surge in bond issuance has seen Saudi Arabia and Qatar return to the public dollar bond markets for the first time since the start of the war. Year-to-date, emerging market sovereign debt sales have reached around $200 billion. Turkey, Kazakhstan, and the Dominican Republic are set to issue dollar and euro-denominated bonds this week. According to the Institute of International Finance, governments have issued a record $190 billion in bonds in the eight months to August.
This represents a significant increase from the $160 billion sold in the same period last year. Jonathan Fortun, chief economist at the Institute of International Finance, noted that emerging markets have become more attractive to investors. He attributed this to a continuous improvement in investor sentiment since last year, rather than a brief fluctuation in 2025.
US Treasury yields have risen sharply this year, reaching around 5%, which could potentially drain liquidity from riskier debt markets. Investors expect the Federal Reserve to raise interest rates three more times by mid-next year. However, the yield premium offered by emerging market bonds over US Treasuries has remained relatively low.
The JPMorgan index is trading at around 2.2 percentage points, down from 2.6 points a year ago. Investors have noted that strong global economic growth, despite higher oil prices due to the Iran war, has boosted demand for bonds from trade-oriented emerging markets. Only $72 billion of this year's issuance is considered "new" money.
Most of the bonds issued this year will be used to refinance existing debt, reflecting higher interest costs and larger debt burdens. Around a third of the total will be issued in euros, up from a quarter in 2024, as countries seek lower interest rates. Countries are also diversifying their currency exposure, leading to a record issuance of debt in China's renminbi.
Qatar recently issued $3 billion in dollar-denominated bonds with yields between 5.3% and 5.5%, its first public debt sale since a private placement in April. The move comes after a significant increase in Qatar's fiscal deficit, which is expected to reach 28% of GDP this year. Saudi Arabia also sold over $3 billion in dollar-denominated sukuk earlier this month.
Key points
- Emerging markets have issued a record $190 billion in bonds in the eight months to August.
- Countries are diversifying their currency exposure, leading to a record issuance of debt in China's renminbi.
- Despite higher interest rates, emerging market bond issuance remains strong, driven by trade-oriented economies and a need to refinance existing debt.
