Latest Treasury selloff undercuts bond deals
THE latest selloff is undercutting bond deals in far-flung corners of the world with Indonesia selling its smallest deal in at least five years.
rather than paying a higher interest rate, the Asian nation chose to shrink the size of its debt offering last Tuesday, selling a fraction of its initial target. It comes a week after a canceled bond sale in russia and a South African debt auction that saw lower demand than usual.
The highest 10-year Treasury yields in more than a year and a stronger dollar are raising allin financing costs for new deals and spurring some borrowers to change their issuance plans.
“Eventually, governments have come to terms that financing costs are on the rise and the sweet spot is behind us,” Trieu Pham, a Londonbased emerging markets strategist at ING Bank NV. “We will probably have to monitor the situation for another few weeks.”
Indonesia’s Finance Ministry sold 4.75 trillion rupiah ($328 million) of non-islamic bonds, well below a 30 trillion rupiah target, and the smallest amount on record, according to data compiled by Bloomberg going back to 2016. The ministry, which received 33.95 trillion rupiah of bids, plans a greenshoe option on Wednesday.
“Financial market conditions, both global and domestic, are still under pressure,” said Deni ridwan, director of government securities at Indonesia’s Finance Ministry. Pressure on the rupiah also “affected investor preference,” he said.
As the Biden administration accelerates the vaccine campaign and introduces a plan to rebuild US infrastructure, the Treasury selloff is back with 10-year yields at pre-pandemic levels of 1.77 percent in Tuesday trading.
While appetite for emergingmarket debt in local and offshore markets remains strong, returns are under pressure. A Bloomberg Barclays index tracking localcurrency developing nation bonds lost 3.3 percent this year to Monday.
Meanwhile, a domestic auction in South Africa last Tuesday saw yields for 2048 securities at 11.5 percent compared with 10.81 percent at the last sale of the securities on January 26. The bid-to-cover ratio was lower than the 2.8 average for this year. Higher debt issuance than budgeted in the fiscal year to date also damped demand.
Still, there are good reasons to be sanguine on the sovereign outlook with russia, South Africa and Indonesia also boasting sizable currency reserves.