After a prolonged period of relative calm, global enthusiasm for bond issuance has been reignited, capturing the attention of investors and policymakers alike.

Data compiled by Bloomberg indicates a remarkable surge in activity during the early trading days of this year, with emerging markets successfully issuing 20 bonds in USD and EUR, totaling an astounding $244 billionThis marks a new record for bond issuance in the developing world, showcasing not only the resilience but also the growing needs of these economies.

Leading the charge was Mexico, making history by conducting Latin America's largest sovereign bond issuance ever, setting the stage for a busy year ahead

Following suit, countries like Indonesia and Saudi Arabia have also taken steps to finance their projects through similar means.

Not only are emerging markets active in the bond market; American corporations are also engaging in a competitive race to refinance a substantial wall of maturing debt due this year and next.

Investors, however, are sending cautionary notes to governments about the "unstable" levels of public debt, warning that excessive borrowing could provoke a backlash in the bond markets.

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Congress unveiled a sweeping agreement worth $1.66 trillion aimed at securing funding for key governmental projects for the fiscal year 2024, thereby averting a government shutdown at the end of the month.

If this agreement is passed, it will signify an ongoing increase in U.Snational debt, allowing the government more room to issue bonds. According to the Congressional Budget Office, by the early 2030s, the combination of welfare spending, mandatory expenditures, and debt interest payments are projected to exceed the government’s total revenueThe debt situation in the United States is only expected to worsen in the coming years.

Apollo Global Management estimates that the U.S

Treasury will issue approximately $4 trillion in bonds this year, with terms ranging from 2 to 30 years, up from $3 trillion last year and $2.3 trillion in 2018.
The U.Sfederal government's total public debt has already surpassed $34 trillion, a historic high as reported by the Treasury on January 2. JPMorgan has cautioned that this $34 trillion in debt represents a "boiling frog" scenario for the economy, where rising deficits and escalating debt service costs could quickly become unsustainable.

"We are accustomed to the notion that the fiscal deterioration of the U.Sgovernment has limited impact on investors, but this paradigm may shift one day," remarked Michael Chebarek, a strategist at JPMorgan.

The International Monetary Fund (IMF) projects that over the next four years, the U.S

budget deficit as a percentage of Gross Domestic Product (GDP) will hover between 6.5% and 8%, significantly up from less than 4% in 2022.

In the corporate bond arena, with the credit spreads between corporate debt and U.STreasury bonds narrowing, coupled with expectations of rate cuts by the Federal Reserve, companies are eager to lock in the relatively low borrowing costs while fearing that declining yields post-rate cuts could dampen investor demandThus, they rush to refinance as they face a massive wall of maturing debt in the upcoming years.

In the first week of 2024 alone, high-rated corporate bond issuances in the U.S

approached $59 billion, exceeding the market's prior forecasts of $50 billion to $55 billion.

The trend is not exclusive to the United States; many developed economies are displaying a similar inclination towards bond issuance.

UK analysts have indicated that 2024 is poised to be its second-highest year for bond issuance, second only to the pandemic year of 2020, with a net issuance projected to be approximately three times the average of the past decade.

Estimates from NatWest suggest that the ten largest countries in the Eurozone will issue around €1.2 trillion in bonds this year, consistent with last year's levels

However, they forecast that this year’s net issuance (considering the effects of quantitative tightening and excluding refinancing of existing bonds) will rise by about 18%, reaching €640 billion.

This trend indicates that governments in the U.S., UK, and the Eurozone are poised to ramp up bond issuance at an unprecedented rateBloomberg Intelligence estimates that these countries, along with Japan, will net issue $2.1 trillion in new bonds to finance spending plans for 2024, representing a 7% increase from last year.

IMF data reveals that the total public debt of developed economies has surged from about 75% of GDP two decades ago to over 112% today

This escalation is attributed to increased borrowing by governments to fund pandemic stimulus plans, healthcare, and pensions for an aging population as well as to support transitions away from fossil fuelsAs borrowing levels rise, this ratio is expected to continue climbing.

Padraic Gavan, head of global debt and interest rate strategy at ING Financial Markets, warns, "Currently, the market is merely enamored with the Federal Reserve’s interest rate cycleOnce this novelty wears off, concerns over deficits will begin to surface more prominently."

Conversely, the Institute of International Finance (IIF) points out that after government debt as a percentage of GDP surged to a historical high of 68.2% last year, emerging markets are likely to increase their bond issuance significantly

This is fueled by the expectation of lower borrowing costs as central banks in Europe and the U.Sare poised to cut interest rates this year.

The early surge in bond issuance strongly supports this viewpoint.

According to Bloomberg’s compiled data, in just the first four days of the new year, governments and corporations from emerging markets, including Mexico, Hungary, Slovenia, Indonesia, and Poland, issued a total of 20 bonds, raising an impressive $244 billion, setting a record for developing economies.

David Hauner, the chief of global emerging market fixed income strategy at Bank of America, remarked, "Emerging markets are emerging from years of capital outflows."

For years, rising interest rates in developed economies have steered investors away from emerging markets, but now, investors are once again focusing on bonds issued by developing countries, both in USD and local currencies, identifying them as an attractive alternative to the lower yields currently seen in developed markets.

"We are optimistic about emerging market sovereign bonds as we see high yields within them," said Jian Guo Jiahang, head of multi-asset investing and management at Pictet Wealth Management in Asia

"The balance sheets of governments in Asian emerging markets have substantially improved compared to the period of the Asian financial crisis; many Latin American countries are oil exporters, and we believe oil prices will remain around $80 in 2024, providing stable fiscal revenues for emerging Latin American countries."

David Hauner pointed out, however, "The drive to invest in emerging markets is primarily reflective of global easing in interest rates, rather than an expectation of robust economic growth among many developing nations."

A significant risk remains, however, that while major powers have various options for managing debt, weaker economies must contend with debt risks more directly and often harshly

For instance, in Mexico, it's reported that the country raised $7.5 billion via the issuance of 5, 12, and 30-year dollar bonds, with demand reaching a whopping $20 billion according to Bloomberg.

Miguel Iturribarria, a strategist at BBVA Mexico, issued a cautionary note: "In the short term, the increase in issuance of both local and foreign currency bonds is not alarmingHowever, if the trend of increasing deficits continues in the coming years, the market may begin to factor in larger risk premiums for these bonds."

In the past, the Federal Reserve and other central banks have resorted to raising interest rates to combat rising inflation, resulting in a dramatic increase in global borrowing costs, making divestment and capital outflows increasingly common

The debt accumulation spurred on by rising rates has led to significant strains on many countries.

Reflecting back on 2023, evidence of distress emerged as Ethiopia entered sovereign debt default for failing to meet the $33 million interest payment on its international bonds, while countries such as Ghana, Sri Lanka, and Zambia faced stagnation in long-standing negotiations regarding bond restructuring.

Widening the lens, the World Bank reports that in the past three years, 18 sovereign debt defaults occurred across ten developing countries, surpassing the total number recorded in the previous two decades.

This indicates that for countries lacking repayment capacity, excessive bond issuing is merely a "poisoned chalice." By the end of 2023, the World Bank has warned of a "crisis" level of debt among developing nations