What are the drivers of the global sovereign debt market?

Looking at the global sovereign debt market, what are the drivers? -Where are the opportunities in this market? Is this an income-generating asset class?

Post financial crisis the global sovereign debt market looks very different to its former self, not surprising given where interest rates are now. Pre-crisis government bonds generated a healthy yield and worked well as part of a balanced income mandate. Low inflation in the post crisis period has ensured that yields have stayed low in the aftermath of central bank’s bond buying programme (known as QE). Even as the Federal Reserve raised interest rates back in 2015 the yield on the policy sensitive 2 year Treasury remained broadly flat over the following year. However as the US consumer price index has moved higher since, alongside expectations of interest rate rises, nominal yields on short-dated Treasuries have risen – making them relatively more attractive.

For the income-focused investor the yields available on riskier sovereign debt, notably sovereign emerging market debt (EMD for short) provide a more opportunistic area for investment. Whilst QE had the unquestionable effect of raising asset prices (through the portfolio rebalancing effect), the impact on EMD was less clear as the wider region navigated the post-crisis period without the luxury of their own central bank support. This would suggest that EMD is less likely to suffer from steep falls in price as global monetary policy begins to tighten towards the end of the cycle. When combined with i) synchronised growth in the global economy and ii) a more stable domestic picture (both financial and political), the income opportunities in the large and diverse universe of EMD should not be ignored.

 

Jordan Sriharan

Head of Fund Research and Senior Portfolio Manager

 

Commentary first appeared in:

FT Adviser (on the 22nd March 2018)

 

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