LatAm bond bankers smile again but hope 2025 wild cards are dealt in their favour

After the stresses of recent years, a largely straightforward 2024 — in a highly volatile world — came as something of a relief for most Latin America bond bankers. This was reflected in GlobalCapital’s survey of 17 heads of LatAm debt capital markets on their expectations for 2025.

There was confidence, yes, but few respondents displayed any extreme optimism. Almost two in three expect issuance volumes to increase, but only four predict they will increase by more than 20% on 2024’s numbers. A majority expects spreads to stay broadly flat, while most are also gearing up for similar issuance conditions: a dash of rates volatility, liberal amounts of investor sensitivity to economic data, but most borrowers being able to find a decent window.

“Issuance volumes may increase next year,” says Adrian Guzzoni, head of Latin America DCM at Citi. “Several major sovereigns have issued record-sized transactions this year and that is a trend I expect to continue.

“Corporate issuance, under-represented in 2022 and 2023, has had a better year and that should also continue.”

International bond issuance from Latin America and the Caribbean surpassed $115bn for the year in November, according to Dealogic, versus less than $81bn for the first 11 months of 2023. In the past decade, annual volumes have usually been $125bn-$130bn.

Max Volkov, head of LatAm DCM at Bank of America, also predicts an increase in volumes to “closer to the typical run rates we have seen since 2010”.

“A number of sovereigns have substantial funding plans,” he says. “Argentine [issuers] should continue to be more active, and there is a strong pipeline emerging out of Mexico.”

Survey respondents were more bullish on corporate and financial issuance — with six out of 17 bankers predicting an increase of over 20% — than on government volumes. Corporates took longer to return to the bond markets en masse after interest rates began to rise in late 2021 than sovereigns, so there could still be more pent-up supply.

Indeed, a lot of the bank loans that LatAm companies signed in 2022, when bond markets were in tatters, need to be refinanced in 2025, while another banker notes that early vintages of Basel III capital products from the region are approaching call dates, suggesting bank issuers will drive volumes.

This comes as there appears to be less room for an increase in sovereign issuance volumes, even though Brazil, Colombia, Mexico and Panama all issued their largest ever deals during 2024.

Still, bankers estimate that fiscal deficit funding needs will rise slightly in 2025, driving chunkier sovereign funding requirements. Mexico, in particular, is gearing up for another big year, having issued over $10bn abroad in 2024. The government has also budgeted to transfer Ps136bn ($6.7bn) to troubled state oil company Pemex next year, triggering speculation that some of that could come from additional sovereign issuance.

This, combined with the suspicion that several of the country’s issuers sat out 2024 amid first Mexican then US elections, has some suggesting a long queue of issuers waiting to come to market.

The LatAm sovereign bond market has a wild card up its sleeve too. Although finance minister Luis Caputo insisted in early November that Argentina would not be returning to international markets soon for the first time since 2018, some believe it will be unable to resist. Secondary yields remained in double digits at the start of December, but if the outperformance continues, it may just be a matter of time.

“Argentina could be the X-factor,” says one DCM head. “If it gets back to where it should be, the increase in LatAm volumes will definitely be over 20%.”

Several DCM bankers scoffed at the optimism of certain rivals on volumes, however. That six bankers are predicting an increase in corporate issuance of more than 20% when domestic markets are “on fire” is particularly puzzling, says one senior banker.

Brazilian, Chilean and Mexican domestic bond markets are in robust shape, but it is Brazil that is frustrating some New York-based originators. They had been competing with a strong local debentures market for a while. Then in 2024, they saw even exporters and traditional dollar funders decide to raise money domestically, as it was cheaper than issuing directly in dollars.

For example, Brazilian mining company Vale issued in its home market in October for the first time since 2015, raising R$6bn ($1bn).

“For most of the past year, it has been quite cost efficient for Brazilian companies to raise funding in the domestic market and swap it to dollars when needed,” says Guzzoni. “This has been one of the reasons Brazil’s share of LatAm issuance has fallen to around 20% of the total.

“However, I do think balance is returning, especially if you look at swap rates, but it’s not clear-cut that it will continue to be more efficient for them to issue locally.”

Not everyone subscribes to this view. Although three bankers did list “international markets becoming more competitive versus domestic bonds” as having the biggest upside potential for issuance volumes in 2025, the same bankers also listed the strength of domestic bond markets as the biggest potential drag on volumes.

Yet Brazil’s drop in issuance share would suggest that, if a normalisation does occur, the potential for a lift in overall issuance is material.

“Conditions in domestic versus external bond markets will continue to be a big factor in how much issuance we see,” says Rodrigo Gonzalez, director in LatAm DCM at BNP Paribas. “Of course, if international markets become more competitive, that will lead to higher volumes.

“But I don’t know if it will happen because local markets have been tighter everywhere and have been continuing to deter not just banks but even corporates from issuing abroad.”

This all adds to the sense that LatAm bankers know what the important issues are, they are just unsure which way the needle will move.

For example, at least four of the six bankers who said that improved market conditions and lower funding costs would be the biggest catalysts for a significant increase in volumes also replied that the most likely drag on volumes was more difficult market conditions and higher resulting funding costs.

Guzzoni at Citi says that the “caveat” on his thesis of an increase in issuance is interest rates. “If they continue on their downward trajectory, our market might be busier again,” he says.

Interest rates are at the top of the list of concerns, with 10 respondents identifying US rates and monetary policy as the biggest risk to the LatAm outlook — way ahead of goings-on in the region itself.

Three other bankers said that trade tensions were the number one risk, which is linked to interest rate policy.

“The key driver of strong primary execution and spread performance in 2024 has been relentless inflows into global fixed income funds, not EM,” says one LatAm bond banker. “This has largely been driven by the expectation that the Fed will begin easing soon and support fixed income.

“To the extent we see further uncertainty about the future path of the Fed, those inflows could dry up, widening spreads and substantially dampening demand for new issues.”

Others argue that, regardless of rate volatility, technical support is extremely strong. Again, redemptions, coupons and maturity payments will return vast swathes of cash to EM bond investors. And if the consensus on the spread is for some widening, it comes with levels already extremely tight, with one LatAm syndicate banker even saying that some pushback would be a good thing.

So far, so good. After all, LatAm bonds weathered elections in places such as France, Mexico, the UK and the US in 2024, not to mention major conflicts across the globe. Perhaps 2025 will turn out to be another solid year of business as usual.

“For at least the start of the new year, we expect similar demand drivers to the last few months: [investment grade] spreads remain tight, which anchors high yield spreads and in turn anchors sentiment toward the emerging markets,” says Volkov. “We expect the first six months to be more active in terms of issuance, with likely improving market conditions.”

But there are wild cards — both good and bad — in the pack. Debt capital markets bankers must hope they are dealt the right ones.