C16140 author annisa lee

The current volume of negative yielding bonds is unprecedented.  With Asia's Emerging Markets providing relatively high yields, Annisa Lee outlines some of the factors affecting the bond markets.

As of June 2016, there were about USD12trn in negative yielding bonds outstanding, according to Fitch. This is unprecedented in terms of its size, and the majority of these are sovereign bonds in developed markets (DM; please see the graph below). This was mainly driven by central bank bond-buying programs and negative deposit rates. We believe this trend will continue, as concerns over the global economic growth outlook and the negative impact of Brexit linger.

Some corporates have even started doing private placements of bonds to the ECB. More bond investors are therefore attracted to the relatively high yields in the emerging markets (EM) space. Asia, as part of EM, has become a big beneficiary. Asian USD bond prices have rallied with ongoing fund inflows pouring into the region both from DM countries and China to buy bonds despite their expensive valuations. Credit spreads are approaching their all-time tights and this spread tightening may continue to create new lows given the macro backdrop mentioned above.

That said, the fundamentals of the region are deteriorating, especially with China’s economic growth slowing down, corporate default rates picking up and leverage going higher. We note that Chinese issuers comprise about 40% of total bonds outstanding in Asia. Any major negative developments in China or / and a potential fund outflow situation (possibly driven by the Fed rate hike) are the key risks that could reverse the strong year-to-date performance in Asian credit markets.      

Value of negative yielding sovereign bonds outstanding by country, 18 August 2016

Annisa Graph   

Source: Bloomberg and Nomura economics team

For more information, read Bloomberg's recent article here.