Global bond markets have experienced a significant selloff, pushing yields on developed-nation government bonds to their highest levels in decades. This trend, largely driven by persistent inflation and increasing public borrowing in major economies like the US, has led investors to demand higher compensation for holding developed market debt. As a result, mortgage repayments and corporate financing costs have increased globally.
Surprisingly, emerging markets (EMs) have proven remarkably resilient during this period, with their bonds shrugging off the selloff that has impacted developed markets. Investors, once demanding a steep premium for EM risk, are now narrowing that gap. EM local-currency bonds have seen a 3.5% gain this year, contrasting with a 1.7% decline for developed-market equivalents. This shift is attributed to stronger macroeconomic fundamentals in EMs, including effective inflation targeting, fiscal discipline, and robust reserve buffers.
Several factors contribute to EM's newfound appeal. Developed nations, particularly the US, are facing a shakier fiscal outlook, making their benchmark Treasuries appear relatively riskier. For instance, the US 30-year Treasury yield has climbed to its highest level since 2007. Persistently high energy prices, exacerbated by the Hormuz disruption, have also kept inflation and yields elevated in developed markets. Some analysts, like Udith Sikand of Gavekal Research, even suggest "EMs are the new DMs," highlighting the perceived failings of developed markets in controlling inflation.
Despite the general resilience, regional specificities exist. Long-dated Gulf sovereign bonds have experienced declines due to escalating regional risks and increased issuance, pushing yields higher. For example, a Saudi 30-year bond dropped 8.5% in price, and comparable Qatari and Omani papers saw even larger drops, partly due to the near-closure of the Strait of Hormuz. The upcoming Federal Reserve's September 16 rate decision is expected to broadly influence Treasury yields, while for Gulf bondholders, geopolitical events in the Strait of Hormuz and individual government funding calendars will also be critical.
This shift in investor sentiment is also evidenced by a rising appetite for local-currency debt over USD paper in EMs, a trend already visible in Africa. Pakistan successfully raised a record $3 billion from a junk bond sale, with orders nearly doubling that amount after a ratings upgrade. JPMorgan Chase's gauge of EM bond premiums over the US has remained steady, further underscoring the perceived stability of EM debt in the current volatile global bond environment.
