Market News

(Bloomberg) -- Emerging-market borrowers are tapping the euro bond market at the fastest pace in over a decade, capitalizing on the rising demand for diversification away from the US dollar.

The surge is being fueled by robust demand for developing debt, with non-dedicated investors playing a bigger role as credit quality improves. While euro-denominated bonds still account for a small share of total emerging-market supply, their volume is expected to remain high — both in absolute terms and relative to dollar-denominated deals.

“If you have an ambition to issue in euros, this is the time to do it,” said Stefan Weiler, the head of debt capital markets for Central Europe, the Middle East and Africa at JPMorgan Chase & Co. in London. “Borrowers have been noticeably more active in diversifying and exploring also some niche markets.”

The dollar index has fallen about 8% this year, with money managers rethinking years of heavy exposure to US assets as Donald Trump’s tariff policies and jabs at the Federal Reserve roil markets. Signs of waning demand for the greenback are building, and low hedge ratios — protection against currency volatility — suggest there’s room for additional declines.

Companies and governments from developing economies have sold €89 billion of euro-denominated debt this year through July 18 — the highest amount for this period since at least 2014, according to data compiled by Bloomberg. Government issuance alone has already exceeded the full-year total for 2024.

While most euro issuance has come from Eastern Europe, with Poland and Romania together accounting for €21 billion, other borrowers — from Chile to South Korea and China — also tapped the market in recent months.

In emerging Europe, the victory of a centrist candidate in May elections triggered a rebound in Romania’s bonds, allowing the nation to sell bonds for the third time this year. Bulgaria raised €3.2 billion following credit-rating upgrades that were spurred by its entry into the euro area next year, while Poland took advantage of the fastest economic growth in Eastern Europe to sell its first green bonds in seven years.

“We have been more active in looking for opportunities outside of US dollars credits,” said Matthew Graves, a portfolio manager at PPM America. He favors Ivory Coast’s euro notes over its dollar bonds on the back of attractive spreads. “Directionally, we like owning euros versus dollars right now.”

Strategists at Goldman Sachs Group Inc. compared euro- and dollar-denominated bonds sold by the same sovereign on the same day this year. They found that euro bonds slightly outperformed their benchmarks more than their dollar counterparts one week after issuance.

“The increase in euro-denominated bond issuance has generally been well absorbed by the market,” the bank’s strategists including Kamakshya Trivedi wrote in a report earlier this month.

The pickup in euro debt sales “is likely to extend given our outlook for less exceptional US growth and for further dollar depreciation,” they added.

Relative-value

Concerns over the US economy are also encouraging relative-value trades. Bank of America, for instance, likes betting on gains in Romania’s euro bonds due in 2044, paired with a bearish stance on the country’s dollar notes maturing the same year.

At JPMorgan, strategists see euro-denominated bonds from Poland, Morocco, Hungary and Mexico as the most compelling among their peers for investors switching out of dollar debt.

Overall appetite for emerging markets has been strong this year as investors grapple with US policy uncertainty, according to David Robbins, co-head of TCW Emerging Markets Group and a four-decade veteran of emerging markets.

“The relative yield advantage you’re getting in EM to what you’re getting in other markets continues to look attractive,” Robbins said.

That has helped fuel debt sales across the board, with dollar-denominated issuance at the fastest pace since 2021. Diversification away from the greenback is unlikely to dent the dollar’s dominance in EM debt as those bonds are part of the JPMorgan’s EM benchmark bond index, and therefore make up a large chunk of investors’ portfolios.

As investors look for relative-value opportunities, borrowers with outstanding dollar debt may look to tap the euro market to diversify their funding sources, said Cathy Hepworth, head of emerging-market debt at PGIM.

Brazil — having already sold over $5 billion in dollar bonds this year — is reportedly keen to sell its first bonds in euro since 2014. Neighboring Colombia plans to issue euro-denominated bonds for the first time since 2016.

One of the two main administrative parts of Bosnia-Herzegovina is preparing to sell bonds on international markets for the first time, with a euro-denominated unsecured 5-year bond offering to follow. And Egypt officials are mulling selling hard-currency securities — including euro-denominated bonds — as part of issuance plans for the next 12 months.

“The dollar, for emerging markets, will always be the core funding currency,” JPMorgan’s Weiler said. But the “euro offers the biggest market depth as an alternative.”

What to Watch

• South Africa, Brazil, Mexico will release inflation prints

• Chile President Gabriel Boric will welcome progressive leaders for a summit in Santiago; Luiz Inacio Lula da Silva of Brazil and Gustavo Petro of Colombia are among those expected to attend

• South Korea will publish GDP data

• Central banks in Sri Lanka, Turkey, Nigeria hold monetary policy meetings

--With assistance from Kelsey Butler, Nicolle Yapur, Jorgelina do Rosario and Kerim Karakaya.