What’s been behind emerging-market bonds’ Covid-19 immunity?

Despite surges in infections, prices of bonds from some developing countries have remained surprisingly buoyant

What’s been behind emerging-market bonds’ Covid-19 immunity?

Despite the massive toll that the global COVID-19 pandemic has taken on vulnerable developing countries, bonds from large emerging markets have managed to remain appealing to global investors.

While western countries in Europe and North America have been able to shut down to contain surges in infections, the poorest countries are faced with the difficult balancing act of reining in the pandemic’s spread without pushing households over the financial edge. Many developing countries have been unable to achieve that balance, and are now facing humanitarian crises brought on by tsunamis of Covid-19 cases.

In India, daily case counts in the hundreds of thousands have overwhelmed the healthcare system; while tallies of infections ebbed somewhat in recent days, difficulties in vaccine procurement leave the country vulnerable to a potential third wave. But citing data from Cbonds Europe SIA, the Wall Street Journal said Indian 10-year bond yields have stayed around 6% since infections started to surge, a handsome premium over the roughly 1.6% from the 10-year U.S. Treasury Note.

“The Reserve Bank of India bought some bonds to keep the market steady in recent months but international investors also played a part,” the Journal said, highlighting how comparatively high real rates in India have made the region attractive for global fixed-income investors.

A similar story has played out in Argentina. According to data from the World Health Organization, a surge in confirmed Covid cases that began in early April hit a high of 213,046 in the week ending May 17. Bloomberg data also showed that from mid-February to the end of March, an index of the country’s foreign-currency bonds reached 14.31% off a roughly one percentage-point rise; that has since declined modestly to around 13.7% amid the new wave of infections.

Contributing to investors’ willingness to hold the relatively high-yielding debt, the Journal said, is the global growth fuelled by loose monetary policy and economic reopening across developed countries. Many EM bond investors, it added, are worried about the prospect of the U.S. Federal Reserve stepping back from its bond-buying and other pandemic stimulus efforts, which would erode the appeal of emerging-market debt.

The pandemic also poses a long-term risk to EM bond investors, according to some hedge-fund managers interviewed by the Journal, as frustrated electorates could vote in radical governments more inclined toward free spending. That includes Colombia, where support for a far-left progressive candidate is gaining traction ahead of presidential elections to be held next year.

“S&P Global Ratings lowered Colombia’s government bond rating to junk status last week citing the government’s recent failure to pass a tax overhaul because of political opposition and widespread protests,” the Journal said.

Still, data from Cbonds show that yields of Colombian 10-year bonds have climbed to 7.3% from about 6% over the past four weeks, according to the Journal.


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