Capital outflow from the bond sector: causes of the situation
The record rise in inflation forced many countries to tighten their monetary policy. These measures caused sharp fluctuations in financial markets, and the geopolitical conflict in Europe aggravated the situation. The largest capital outflow in 17 years has been observed.
According to JPMorgan, during the current year investors have withdrawn funds from bond funds for the total sum of $50 billion. First of all, it concerns emerging markets that once again proved the concerns of investors about the safety of this type of asset. Experts note that today’s capital outflows are much more serious than those seen in 2015 when panic was spreading across markets amid deteriorating economic processes in China.
According to Mark Ruijer of William Blair, the market is currently in a “perfect storm” for EM debt. And it is influenced simultaneously by several strong factors: growth of global inflation, geopolitical tension, and tight monetary policy of regulators.
It should be noted that EM bonds have a higher risk level than similar instruments of states with developed economies. At the same time, such a mass outflow of capital from the sector caused a serious collapse in securities prices. As a consequence – there is a decrease in the index, which reflects the situation with dollar EM-bonds. In the current year, the total yield here was at the level of minus 18.6%, which is the lowest result in the history of these bonds.Emerging markets still haven’t fully recovered from the pandemic, and then a new global test hit them. As a result, economic activity has fallen and investment has declined. Forecasts from experts are not optimistic, especially since the Fed plans to continue tightening monetary policy. An increase in interest rates will lead to an increase in fixed income from U.S. government debt, which has a high level of reliability. Against their background securities of other countries will not look as attractive, and interest in them will decrease. In addition, we should not exclude the impact of the global economic downturn and the slowdown of its growth in states with strong markets.
It should be noted that the geopolitical conflict has caused a crisis in commodity markets, but there were countries that benefited from this situation. We are talking about exporters, who have increased their supplies and have high profits in the background of rising prices. Importers, who have to buy raw materials at several times higher prices than last year, are in a worse situation. In addition, many of them are looking for new sellers and changing their delivery schemes.