Goldman cautiously seeks yield in emerging debt

The hunt for yield is back for emerging market investors, but with some caution.

Quasi-sovereign bonds, corporate notes held at least in part by a government, are in vogue for companies such as Goldman Sachs Group Inc. and Barings LLC seeking strong returns amid economic uncertainty.


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This debt, which includes some credit risk, pays more than sovereign bonds and is often considered safer than pure corporate bonds. A Bloomberg Barclays gauge of emerging market corporate debt and the quasi-sovereign dollar has returned 5.7% since the virus shut down cities in early March 2020, compared to a return of 3.3% on a following comparable index strictly government notes.

Investors are concerned about the impact of the delta variant on the nascent recovery in global growth. These worries have driven returns down, sparking interest in assets that can offer attractive returns alongside mitigating risk.

“Quases are often a high beta version of the Sovereign,” said Sara Grut, senior strategist at Goldman Sachs in London. “If you like rulers for transportation, it makes sense to look at some of the quasis.”

While the company’s analysis shows the median spread of quasi-sovereign bonds with a yield increase of 80 basis points, energy-related bonds of state-owned companies such as KazMunayGas in Kazakhstan and Southern Gas Corridor in Azerbaijan could offer even more.

Mexican state oil company Petroleos Mexicanos also looks cheap and has administration backing, said Omotunde Lawal, London’s head of emerging market corporate debt at Barings. Pemex’s 2050 dollar bonds, as the driller calls it, return about 8.1% against the 4.1% yield on Mexican government bonds of the same maturity, according to data compiled by Bloomberg.

“You get even more comfort from the fact that it’s government owned and it’s very strategic for the Mexican government,” Lawal said. “It’s really about looking at it as a spread over the Sovereign.”

Political risk is intensifying from Latin America – where Peru has elected a left-wing leader – to China, where recent crackdowns have hit borrowers, including state-owned enterprises, as policymakers redouble their efforts. ‘efforts to establish financial discipline and reduce moral hazard in credit markets.

The scrutiny of state-linked debt has intensified this year, with investors considering a potential restructuring of bad bank China Huarong Asset Management Co. This adds to concerns after a surge in defaults among state-owned enterprises in the end of last year.

Central bank watch

  • Mexico’s central bank could raise interest rates on Thursday to contain inflation, even as the economy struggles to regain a foothold after the sharpest economic contraction in nearly a century
  • Turkish monetary authority set to leave borrowing costs unchanged on same day, despite pressure from President Recep Tayyip Erdogan to cut rates
    • The CBRT has pledged to keep the policy rate, currently 19%, above realized and expected inflation, and a price spike in July pushed inflation to 18.95%.
  • The Philippine central bank will likely keep its key rate at a record 2% also on Thursday. The peso approached its lowest since May 2020 after the central bank said a reduction in the reserves ratio was on the table. Governor Benjamin Diokno said on Monday that cutting the reserve rate was not on the agenda for this week’s Monetary Council meeting.
    • “Reports of a possible RRR reduction triggered a short USD / PHP hedge,” said Eugenia Victorino, Asia Strategy Manager at Skandinaviska Enskilda Banken AB in Singapore. “But given the weakness in domestic demand, there is no real demand for the pair at this point.”
    • The nation will release gross domestic product data on Tuesday. The economy likely grew 12.6% from a year ago in the second quarter, according to Bloomberg Economics. Strict two-week lockdown in Manila through August 20 weighs on growth prospects
  • Peru’s central bank to hike rates by 25 basis points to 0.5% in response to rising inflation and inflation expectations, according to Bloomberg Economics
  • Brazil’s monetary authority will release the minutes of its last meeting on Tuesday, in which policymakers raised the Selic rate by one percentage point.
  • Romania’s central bank chief, who has adopted a more hawkish tone of late, will present an update on inflation forecastsa

What else to watch

  • Inflation at China’s factories rose again to 9% in July as commodity prices soared, while basic consumer prices – which exclude volatile food and fuel costs. – grew the most in 18 months, according to a report released on Monday.
  • Mexico to release consumer price data for July on Monday, giving investors and economists a final snapshot of inflation ahead of Thursday’s central bank decision
    • The nation will also release industrial production figures on Wednesday.
  • Traders will also watch Brazil inflation figures on Tuesday, retail sales data on Wednesday and June economic activity on Friday for signs of growth in Latin America’s largest economy.
  • India to release inflation data on Thursday
  • In Colombia, traders will monitor June retail sales on Thursday for clues on shoppers’ behavior in the face of persistent pandemic risk
  • A flash read of Russia’s GDP data on Friday is likely to show a rebound in the second quarter, supported by stimulus and energy prices
  • On the same day, Poland is expected to post a rebound in its GDP
  • Malaysia’s GDP data release, also on Friday, will show that the economy grew 14.5% from a year ago, supported by a favorable base effect after last year’s contraction in reason for the pandemic, according to Bloomberg Economics

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