Demand for emerging market bonds climbs to the highest level in 17 years

The search for yield in emerging markets is back with a strength not seen in 17 years. Investors are buying up the bonds of some of the world’s poorest countries so fast that their risk premium is declining at the fastest rate since June 2005 relative to their investment-grade counterparts, according to data from JPMorgan Chase & Co.. And i Countries that were on the verge of default just a few months ago, such as Pakistan, Ghana and Ukraine, are leading this high-yield rally.

Earlier this month, the most brutal sell-off since the 2008 financial crisis had emerging-market money managers talking about how cheap high-yield bonds are. But bonds continued to be shunned as US yields surge led by the Federal Reserve’s aggressive monetary tightening. With the pace of interest rate hikes likely to slow, investors rushed back.

“Cheaper emerging-market high-yield bonds look more attractive than their investment-grade counterparts,” said Ben Locke, multi-national analystasset senior of State Street Global Markets. Also, the recent recovery in commodity prices prime, in particular of oil, could “generate higher cash flows and reduce the possibility of any sovereign default in the near term”.

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The JP Morgan index showed that “investor demand” for a risk premium for owning high-yield sovereign bonds in emerging markets instead of US Treasuries fell by 108 basis points in the month to Nov. 15. That led to a narrowing of the gap between them by 85 basis points, which is the largest monthly decline since the Federal Reserve raised interest rates 8 times, totaling 200 basis points in 2005, according to “Bloomberg.” , and viewed from “Al Arabiya.net”.

The outperformance of high yield bonds comes when there has not yet been a wave of defaults in the wake of the Russian invasion of Ukraine, with the exception of Sri Lanka. Most other countries continued to service their debt, striking some deals with the International Monetary Fund, which made investors confident enough to return to bonds.

And while the debt yields in dollars for Egypt and Nigeria have fallen since the end of October to about 13% and 12%, respectively, risks have been mitigated in Nigeria from limited external depreciation in the next few years e in Egypt’s recent IMF deal and cuts, Tellimer analysts have written on the value of the currency, although their long-term outlook is not favourable.

“The decline in risk appetite has opened up an opportunity for outperformance in some asset of emerging markets, in particularly those that have oversold fundamentals,” they wrote in an email Stuart Culverhouse and Patrick Curran of Tellimer. “But the caution is still warranted in some of the most miserable stories, like Ghana and El Salvador, or where external financing needs are great and market access is limited, like Pakistan.”

Reopen access

For his part, Guido Chamorro, co-manager of the debt in emerging markets hard currency at Pictet Asset Management, said while questCapital markets were closed to riskier borrowers this year, some including Serbia, Uzbekistan, Costa Rica and Morocco could return to fundraising if they decline, more is going on. Turkey has sold bonds this month as the risk premium on its debt increases in dollars fell to its lowest level in one year.

However, smaller emerging economies still have a long way to go before achieving debt sustainability, and this could weigh on investors’ minds in 2023.

Credit ratings have plummeted in recent years as debts have increased and financial margins have narrowed due to the pandemic and the Russian invasion of Ukraine. In Africa, the Middle East, Latin America and the Caribbean, more than 50% of sovereign bonds are currently rated B or lower, according to Moody’s.

This has increased the risk of default or restructuring among governments with higher financing needs over the next three years or high debt maturities relative to foreign exchange reserves, according to the ratings company. The group includes countries such as Ghana, Pakistan, Tunisia, Nigeria, Ethiopia and Kenya.

However, the investor panic that has driven the gap between risk premia on high-yield debt and investment debt widened to record by 890 basis points in July, it eased in amidst a flurry of deals with the International Monetary Fund, bilateral financing pledges and hopes of an easing of militancy by the Fed.

On the other hand, the Bloomberg index of high yield bonds in the countries in via growth has risen about 7% since September, following five quarters of declines that were the longest losing streak ever. Average returns dropped to under 12% after breaking above 13% in October. Chamorro said this has prompted Pictet Asset Management to become “more positive recently” in the class asset.

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