RAPIDLY rising Treasury yields have brought back fears of a potential wave of defaults across emerging markets, with investors questioning which countries struggling with heavy debt loads will miss payments or be forced to restructure first.
A total of 21 emerging-market nations have sovereign US dollar debt trading near distressed levels, as measured by their sovereign US dollar bonds trading around a 1,000 basis-point premium to Treasuries, data compiled by Bloomberg indicated. The number could go up this week as the weekend attacks in Israel, with its potential to spark conflicts across the region, could undermine risk appetite further.
Ethiopia is seen by investors as one of the most likely to default next, with a yield spread over Treasuries of almost 50 percentage points. Tunisia, Pakistan, Argentina, Bolivia and Egypt are also seen at risk.
Now, with US yields near 5 per cent and the US dollar at the highest in a year, the ripple effects of what Bank of America Corp strategists call “a bond shock extraordinaire” are becoming clear. And while junk debt markets have been relatively calm recently, optimism is fading for the countries with the most fragile balance sheets.
Hopes for quick recoveries from defaults have also been dashed. Restructuring negotiations in Sri Lanka and Ghana are dragging on, and Zambia plans to sign a deal to restructure US$6.3 billion in debt by the close of International Monetary Fund meetings this week.
“In a higher-for-longer rates environment, it is inevitable that vulnerable issuers will have difficulty accessing primary markets and be forced to re-profile their debt load,” said Jennifer Taylor, head of emerging-market debt at State Street Global Advisors, a US$3.6 trillion asset manager.
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Refinancing is increasingly unaffordable, especially with the average yield on junk-rated countries approaching 12 per cent, the highest since November. New bond sales have also dried up, showing lack of demand.
Plus, repaying debt is more difficult with weaker exchange rates. Currency losses over the past year range from 5 per cent against the dollar in Ethiopia, to 57 per cent in Argentina.
Among investors, the mood is bleak. Emerging-market debt funds have recorded nearly US$23 billion in withdrawals so far this year, according to a Bank of America report that cited EPFR Global data.
“It would be strange if this current ascent in bond yields ended without significant casualties in the global financial system,” said Arthur Budaghyan, chief emerging-market strategist at BCQ Research.
Among junk-rated sovereigns, only Guatemala, Uzbekistan, Trinidad and Tobago, and the Emirate of Sharjah in the United Arab Emirates could sell euro- or US dollar-denominated bonds in the second half of this year, raising a total of US$2.4 billion, data compiled by Bloomberg indicated. There was almost no issuance in the latter half of last year, compared with US$16.4 billion in the second half of 2021. BLOOMBERG
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