Fed rate cuts to boost Eurobond issuance in emerging markets – IMF

Potential rate cuts by the United States Federal Reserve will boost Eurobond issuance in emerging markets like Nigeria, the International Monetary Fund (IMF) has said.

It noted in a recent statement that Eurobond issuance recovered to $40 billion as central banks in advanced economies eased monetary policies.

This also eased global interest rate conditions and allowed emerging markets to return to the market in the first quarter of 2024.

The Federal Open Market Committee (FOMC), the monetary policy-making arm of the Federal Reserve System, has held rates steady at 5.25-5.50 percent for the seventh consecutive time.

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But with the US inflation rate within the Fed’s target, the Fed has indicated intentions to cut interest rates. This would further support capital inflows into emerging markets.

“Nigeria’s carry trade is very appealing at the moment, one of the highest in Africa. A rate cut by the US Fed is likely to support capital flows to emerging and frontier markets, which Nigeria will certainly benefit from,” Samuel Gbadebo, fixed-income analyst at CardinalStone, earlier told BusinessDay.

At the beginning of the year, investors’ interest in emerging-market bonds rose, but Nigeria did not get the same interest as other markets as it battled a dollar shortage.

“The sharp slowdown of Eurobond net issuance by emerging market and developing economies, fell by 70 percent to an annual $40 billion in 2022-23, relative to the prior two years. During this period, 26 of 75 countries saw net Eurobond outflows, totalling $58 billion,” the IMF said.

Interest rates in advanced economies like the US have a push-and-pull effect on Eurobond issuance in emerging markets.

“During the monetary policy tightening by the Federal Reserve and other major central banks, Eurobond inflows in many lower-rated emerging markets and developing countries dried up as borrowing rates reached prohibitive levels,” the IMF said.

However, the rate cut will make borrowing costs cheaper in the US allowing investors to invest in emerging markets and developing economies.

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“It will be cheaper for foreign investors to borrow some funds in the US and come and invest in Nigeria and that way it’s positive for Nigeria through capital inflows,” Matilda Adefalujo, fixed-income analyst at Meristem Securities earlier told BusinessDay.

Eurobonds are international debt instruments issued by countries in a currency different from their own, typically the US dollar or the euro. They are often used by emerging markets to allow borrowers access to foreign capital and diversify their funding sources.