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  • Emerging Markets Debt Daily

    China Joins “Negative Yield” Club

    Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
    November 20, 2020

    China placed a 5-year EUR-denominated bond at a negative yield. The Turkish currency’s morning moves point to skepticism about the recent policy U-turn. 

    The yield on China’s 2026 euro-denominated bond dropped below zero (see chart below), and the 5-year tranche of the new euro-denominated bond was also placed at a negative yield (-0.152%). This happened despite growing concerns about stresses on the corporate bond market and corporate defaults, including local state-owned enterprises. It remains to be seen how the government will tackle the situation, as it involves the “tradeoff” between near-term collateral damage associated with defaults/cross defaults and longer-term dislocations stemming from moral hazard.

    The Turkish saga continued this morning as the currency weakened back to the pre-hike level. There was some profit-taking, but it looks like the market is still uncertain whether the policy U-turn is for real. President Tayyip Erdogan’s belief that higher rates lead to higher inflation can derail monetary policy adjustment at any time, and this remains a major issue for investors. In the meantime, regulators made some tweaks in the key banking ratio to make lira deposits more attractive – and hopefully reduce dollarization. It’s a small step, but every little bit helps…

    The market reaction to Thailand’s anti-appreciation measures was muted. There was nothing earth-shattering, with the emphasis on longer-term trends (easing capital outflows) rather than near-term currency movements. The currency’s strength poses some policy challenges for the central bank, as it weighs on recovery and exports. But authorities wisely decided not to rock the boat against the backdrop of global uncertainty and the second wave of the virus. 

    Chart at a Glance: China EUR Sovereign Yield Drops Below Zero


    Source: Bloomberg LP


    PMI – Purchasing Managers’ Index: economic indicators derived from monthly surveys of private sector companies; ISM – Institute for Supply Management PMI: ISM releases an index based on more than 400 purchasing and supply managers surveys; both in the manufacturing and non-manufacturing industries; CPI – Consumer Price Index: an index of the variation in prices paid by typical consumers for retail goods and other items; PPI – Producer Price Index: a family of indexes that measures the average change in selling prices received by domestic producers of goods and services over time; PCE inflation – Personal Consumption Expenditures Price Index: one measure of U.S. inflation, tracking the change in prices of goods and services purchased by consumers throughout the economy; MSCI – Morgan Stanley Capital International: an American provider of equity, fixed income, hedge fund stock market indexes, and equity portfolio analysis tools; VIX – CBOE Volatility Index: an index created by the Chicago Board Options Exchange (CBOE), which shows the market's expectation of 30-day volatility. It is constructed using the implied volatilities on S&P 500 index options.; GBI-EM – JP Morgan’s Government Bond Index – Emerging Markets: comprehensive emerging market debt benchmarks that track local currency bonds issued by Emerging market governments.; EMBI – JP Morgan’s Emerging Market Bond Index: JP Morgan's index of dollar-denominated sovereign bonds issued by a selection of emerging market countries; EMBIG - JP Morgan’s Emerging Market Bond Index Global: tracks total returns for traded external debt instruments in emerging markets.

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