In recent editions of our Weekly Credit Insight we discussed the main risks and issues facing investors going into the new year.
The risk that monetary stimulus programmes across the globe could be withdrawn earlier than expected, as the effects of the Covid-19 pandemic still reverberate, was among the issues highlighted. There is a chance a taper tantrum could emerge in 2021.
During the original taper tantrum of May 2013, emerging-market credit was one of the areas worst hit, as investors feared higher funding rates would drive spreads wider.
This time around the velocity and magnitude of the moves on US 10-year treasury yields is smaller. Nevertheless, emerging-market credit is feeling the pressure. In terms of both performance and flows, this segment of the credit market is lagging after an excellent 2020, where emerging-market high-yield was the highest returning credit asset class, undoubtedly helped by record amounts of negative-yielding debt. So far in 2021, emerging-market and sovereign market credit has delivered negative returns of 85bps and 150bps respectively, underperforming European high-yield, which is up 49bps.
Put differently, the correlation between emerging-market and global credit is at a three-year low, as the rates move has a more adverse effect on the former than the latter (see figure 1).
Figure 1. The correlation between emerging-market and global credit approaches a three-year low
Source: Federated Hermes and ICE Bond Indices, as at 13 January 2021.