Macroscope | Fall in emerging market junk bonds and domestic defaults spur China to action
Nicholas Spiro says the severe decline in emerging markets’ high-yield bonds so far in 2018 has two real, if seemingly contrary, benefits: it has given investors a more accurate assessment of these bonds’ real value, and it has prompted China’s government to enact stimulus measures – meaning Asian junk bonds are now on the rise
At the end of last year, dollar-denominated sub-investment grade corporate bonds in developing economies were all the rage, so much so that the gap, or spread, between the average yield of the high-yield component of JPMorgan’s benchmark Corporate Emerging Market Bonds Index (CEMBI) and its United States equivalent had fallen deep into negative territory. In other words, emerging market junk bonds were yielding less (and were therefore considered a safer bet) than speculative-grade American corporate debt.
Fast forward seven months, and the tide has turned. While US high-yield debt has proved remarkably resilient this year, emerging market junk bonds have sold sharply, driving the spread over US high-yield debt back into positive territory.