Global Creditors Rush to Government Bonds, Croatia Mentioned

After the Fed unexpectedly decided to continue its massive monetary stimulus to the U.S. economy for a few more months in the middle of this week, global creditors have rushed to seek out government bonds into which they could pour billions of dollars of cheap money, with Croatia mentioned among them.

On the global debt market, $16.6 billion was raised through bond sales on Thursday alone, four times more than on Wednesday. According to Reuters, more than 20 countries and companies – from Italy’s Intesa to Saudi conglomerate Sabic – announced bond issuances.

Among those who entered the global bond market was Armenia, with a non-investment grade rating, and investors were pleased to buy its bonds yielding 6.25%!

On the other end of the rating spectrum, American conglomerate Cummins, with an A rating, sold 10- and 30-year bonds with yields of 3.75% and 5%, respectively.

Analysts say this is just the beginning of a surge in the debt market, after the Fed decided on Wednesday to extend its bond-buying stimulus program worth $85 billion per month.

By keeping its extremely loose monetary policy unchanged, the Fed pleasantly surprised investors who expected a $10 billion monthly reduction in that program.

This has effectively allowed the U.S. central bank to continue the era of cheap money in the world, leading investors to conclude that the surge in demand in the bond market could last at least until the end of the year.

“To issue bonds, you ideally need an attractive yield and a good environment, which implies no uncertainty and risk. Since Wednesday, it seems that the market has met those conditions,” claims Xavier Baraton from HSBC Global Asset Management.

Emerging market countries are likely to benefit the most from the Fed’s decision to continue injecting cheap money into the financial system to bolster the U.S. economic recovery.

“This is the best moment for countries like Croatia, Serbia, Slovenia, Hungary, Ukraine, and even Turkey to increase their hard currency reserves at a reasonable price,” say Commerzbank.

Turkey, which has so far realized only two-thirds of its $6.5 billion foreign borrowing plan for this year, selected a bank on Thursday to conduct the sale of Islamic bonds.

Hungary, on the other hand, has prepared everything to raise $5 billion through bonds, likely intending to pre-raise funds for financing in 2014.

And for Eurozone countries that chronically lack budget funds, such as Spain and Italy, this is an opportunity to obtain money cheaply – so far, these countries have achieved three-quarters of their total foreign borrowing plans for this year.

“If I were responsible for financing in any of those countries, I would take advantage of this situation. I believe it is wise to try to raise as much money as possible for financing next year,” says Philip Tyson, a strategist at London’s ICAP.

Because one thing is clear, this is a kind of grace period, not a blank check from the Fed.

“The Fed will eventually reduce monetary stimulus. The story of reducing liquidity in the global financial system is not over,” says David Spegel from ING Bank.