Emerging market bonds seem immune to coronavirus. Take the 10-year Brazilian government bond yield, which has barely budged this year. After having climbed in the last fortnight to 6.78%, it is still tighter than the 6.8% at which it closed 2018 and in a world different from the 12.5% it had reached in September.
In fact, emerging bonds as a whole are holding up well in the midst of the massive sale that has touched risky assets across the board. Does this make it a strange refuge?
Simon Quijano-Evans, chief economist at Gemcorp, a Mayfair fund manager, says it does not depend on the MEs themselves but on the response – or lack thereof – from world governments.
“The G20 [group of leading nations] must respond in a coordinated manner, “he said. “We have seen a total collapse of G20 coordination in the past three or four years and this must change, lest it turn into something much more serious.”
So far, he said, investors in emerging bonds are nervous but the key question is how long it will last. Adam Wolfe, emerging markets economist at Absolute Strategy Research, said that investors had already incorporated “fairly aggressive” interest rate cuts from central banks in developed markets and that an ongoing search for yield had supported emerging bonds.
But if the monetary stimulus that investors rely on is insufficient, he added, fixed income assets in emerging markets will be put under pressure.
Quijano-Evans looked at the largest five-day declines in the past four decades for the total return indices for US S&P 500 stocks, European stocks for the Xetra Dax in Frankfurt, and EM sovereign bonds for the JPMorgan index EMBI-Global Diversified.
The S&P index fell 11.5% last Friday and the Xetra Dax index 11.3% in dollars. The two are in the same stage as similar shocks since the 1980s. But the emerging market bond index fell only 2.1% last week, a fraction of its losses from previous swings, while ‘he was in line with American and European stocks.
The spread on emerging bond yields relative to US Treasuries has widened, he noted, but the magnitude of the decline in US yields means that emerging bonds have also held up well.
This could testify to the work accomplished by central banks and governments of emerging countries over the past decade to control inflation and stabilize their currencies. “They’ve reduced some of the risk,” said Wolf.
The danger – as the OECD noted on Monday – is that the viral epidemic is causing a global slowdown, further hitting commodity prices, starting with oil. Brent crude fell below $ 50 a barrel on Monday. While this could benefit energy importers such as Turkey and India, it would cause serious problems for exporters in Latin America, Africa and the Middle East who have so far suffered relatively little damage .
Brazil too would surely be in the crosshairs.
Emerging market bonds seem immune to coronavirus. Take the 10-year Brazilian government bond yield, which has barely budged this year. After having climbed in the last fortnight to 6.78%, it is still tighter than the 6.8% at which it closed 2018 and in a world different from the 12.5% it had reached in September.
In fact, emerging bonds as a whole are holding up well in the midst of the massive sale that has touched risky assets across the board. Does this make it a strange refuge?
Simon Quijano-Evans, chief economist at Gemcorp, a Mayfair fund manager, says it does not depend on the MEs themselves but on the response – or lack thereof – from world governments.
“The G20 [group of leading nations] must respond in a coordinated manner, “he said. “We have seen a total collapse of G20 coordination in the past three or four years and this must change, lest it turn into something much more serious.”
So far, he said, investors in emerging bonds are nervous but the key question is how long it will last. Adam Wolfe, emerging markets economist at Absolute Strategy Research, said that investors had already incorporated “fairly aggressive” interest rate cuts from central banks in developed markets and that an ongoing search for yield had supported emerging bonds.
But if the monetary stimulus that investors rely on is insufficient, he added, fixed income assets in emerging markets will be put under pressure.
Quijano-Evans looked at the largest five-day declines in the past four decades for the total return indices for US S&P 500 stocks, European stocks for the Xetra Dax in Frankfurt, and EM sovereign bonds for the JPMorgan index EMBI-Global Diversified.
The S&P index fell 11.5% last Friday and the Xetra Dax index 11.3% in dollars. The two are in the same stage as similar shocks since the 1980s. But the emerging market bond index fell only 2.1% last week, a fraction of its losses from previous swings, while ‘he was in line with American and European stocks.
The spread on emerging bond yields relative to US Treasuries has widened, he noted, but the magnitude of the decline in US yields means that emerging bonds have also held up well.
This could testify to the work accomplished by central banks and governments of emerging countries over the past decade to control inflation and stabilize their currencies. “They’ve reduced some of the risk,” said Wolf.
The danger – as the OECD noted on Monday – is that the viral epidemic is causing a global slowdown, further hitting commodity prices, starting with oil. Brent crude fell below $ 50 a barrel on Monday. While this could benefit energy importers such as Turkey and India, it would cause serious problems for exporters in Latin America, Africa and the Middle East who have so far suffered relatively little damage .
Brazil too would surely be in the crosshairs.
