Previous post Next post

Emerging market sovereign debt update: yields are falling

Yields have fallen significantly in the EM sovereign bond space in local currency; USD movements will be key to watch for going forward.

Yields have fallen impressively in the emerging market (EM) sovereign bond space in local currency, reaching 5.3% on 16 August, near their all-time low of 5.2% (in May 2013). This downward movement has been partly driven by the recent policy rate cuts of some EM central banks. The stabilisation of inflationary pressures thanks to a lower oil price and less weak EM currencies against the US dollar this year than in 2018 gave room for a reversal of previous tightening.

Without surprise, the year-to-date total return of EM debt in local currency has been strong at 9.7%, thanks to the 116-bp fall in yield and the high coupon (6.1%). As risks of further financial market turmoil and global recession increase, EM currencies could weaken against the US dollar (they are usually considered as risky assets and the latter as a safe-haven), thereby limiting the room for further monetary easing by EM central banks (in our negative scenario, 35% probability).

In our central scenario we expect EM currencies to remain broadly stable against the US dollar until year-end, except for a few idiosyncratic stories (negative or positive). Overall, we remain overweight EM sovereign debt in local currency, and in our central scenario we expect yields to fall slightly more (towards 5.0% by year-end) as EM central banks continue to cut their policy rates, bearing in mind that most of the rate cuts seem already priced in.

Inflation and Policy Rates Average in Some EM, 2012-2019

Inflation and Policy Rates Average in Some EM, 2012-2019

- Click to enlarge


Read full report here

Full story here Are you the author?
Previous post See more for 2.) Pictet Macro Analysis Next post
Tags: ,,,

Permanent link to this article:

Leave a Reply

Your email address will not be published.

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>

This site uses Akismet to reduce spam. Learn how your comment data is processed.