Tuesday , September 17 2019
Home / Perspectives Pictet / Emerging market sovereign debt update: yields are falling

Emerging market sovereign debt update: yields are falling

Summary:
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

Topics:
Laureline Chatelain considers the following as important: , , ,

This could be interesting, too:

Jean-Pierre Durante writes Oil market: supply disruption is here

Cesar Perez Ruiz writes Weekly View – The ECB’s last bazooka

Thomas Costerg and Dong Chen writes US-China – Towards a trade truce?

Jean-Pierre Durante writes Oil prices and the global economy

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.

Laureline Chatelain
Do not hesitate to contact Pictet for an investment proposal. Please contact Zurich Office, the Geneva Office or one of 26 other offices world-wide.

Leave a Reply

Your email address will not be published. Required fields are marked *