To get a sense of how much global investors are embracing risk, look no further than emerging-market junk bonds.
Developing-nation debt in the CCC and CC categories is handing investors 10 times the returns of investment-grade bonds, data for the past month show. A Bloomberg Barclays gauge of high-yield securities is outperforming its higher-rated counterpart by the most in 20 years and has erased the yield surge caused by the March rout.
Investors are getting adventurous as they bet on a revival in global economic activity and an accommodative stance by the Federal Reserve. The rebound from the selloff sparked by the coronavirus is now moving to a new phase, in which riskier nations and assets are coveted by yield-hunters.
Relative Value
The ratio between the Bloomberg Barclays EM High Yield Total Return Index and a similar gauge for investment-grade bonds increased 3.7% last week, the biggest jump since June 2000. The relationship is tilting in favor of junk bonds for a seventh successive week.
Yield Spread
The premium investors demand to own emerging-market high-yield bonds rather than higher-rated debt has fallen to levels last seen at the end of February. That marks a halving of that spread, from 11.3 percentage points in early May to 5.4 percentage points. In other words, the Covid-19 pandemic isn’t imposing a yield-penalty on junk bonds anymore.
Category Returns
CC rated bonds in the Bloomberg Barclays EM USD Aggregate Total Return Index have posted a 27% gain in the past month, outperforming every other group, according to Bloomberg Composite Ratings. The return from AA rated bonds is just over 2%, the worst performance in the gauge.
Junk Treasures
The resurgence of junk bonds is a signal that the yield-hunting trend, which has been the hallmark of every emerging-market advance in recent years, is truly back. And it may continue if the Fed signals continued support.
This article was provided by Bloomberg News.