US treasury yields were in the spotlight in February 2021. With the bond sell-off accelerated, the 10-year US treasury yield, considered as a benchmark for global borrowing costs, reached a one-year high of 1.6% (note that bond prices and yields move in opposite directions). Notably, this level tops the S&P 500 dividend yield, meaning that bonds are becoming more attractive for investors. At the same time, 5-year treasury yield reached 0.8%, while 30-year 2.27%.
Why are the yields growing? In response to the FED’s expansionary monetary policy to boost the economic recovery, the yields dropped to historic minimum in March 2020. 2021 kicked off with improved economic prospects as COVID-19 vaccines and Joe Biden’s large fiscal stimulus boosted investor optimism. This also led to increased inflation expectations (US medium term inflation expectations hit 13-year high) among investors, although in its recent statements, Fed Chairman Jerome Powell played down inflationary pressures (see our report). As a result, investors have dumped US treasuries, moving to riskier assets, causing spike in treasury yields.
What does growing bond yields mean for the markets? On the one hand, increasing bond yields make bonds more compatible to stocks. On the other hand, growing interest rates pressure equity values as present value of companies’ future cash flows is reduced (due to higher discount rate).
After a strong non-resident portfolio flows to Emerging markets (EM) in January 2021 (US$ 53.5bn), capital flows to EMs cooled down, with US$ 31.2bn invested to EM bonds and stocks in February 2021 according to Institute of International Finance. Notably, this level is the lowest since August, reflecting the slowdown in investments on the back of increased US treasury rates. Of the US$ 31.2bn portfolio inflows, US$ 8.4bn went into equities, while the rest into debts markets. Furthermore, in equity markets China was the top recipient of the funds, accounting for 93% of total equity flows, while in debt markets China accounted for c. 40% of inflows.
In its February 2021 sovereign credit rating updates, Fitch affirmed ratings on Georgia (BB, Negative), Russia (BBB, Stable), Kazakhstan (BBB, Stable) and Ukraine (B, Stable), while Turkey’s outlook was revised to Stable, maintaining ‘BB-‘ rating. Notably, on 26 February, S&P Ratings revised its outlook on Georgia to negative from stable, maintaining BB rating.
The hike in US treasury yields were also felt by regional Eurobonds, with yields on most of the sovereign issues growing in February 2021. TURKEY 21 and UKRAINE 21 were the worst performers of the month, with yields hiking by 135bps and 123bps, respectively. Yields on ARMENIA 25, GEORGIA 21 and UZBEK 24 widened by 76bps, 54bps and 30bps, respectively in February, while yields on other sovereigns remained mostly unchanged. At the same time, the largest growth in average spreads over respective US treasuries was recorded for UKRAINE 21 (c. 280bps in February vs 186bps in January), followed by GEORGIA 21 (+42bps) and UZBEK 24 (+28bps).
Georgian corporate Eurobonds traded in green in February 2021. Yields on SILKNET 24 and CGEOLN 25 (GGU) declined by 12.5bps and 19.6bps in February 2021, respectively. Meantime, yields on other Georgian placements (excluding perpetuals) declined in the range of 34-40bps. Notably, Silknet’s spread over comparable regional telecom operators narrowed by c. 25bps in February 2021, compared to January 2021. While the contraction was more significant for GRAIL, with spread over comparable regional rail companies down by average 75bps in February vs January, 2021.
Please see the full report for detailed coverage of the fixed income markets of Georgia, Armenia, Azerbaijan, Belarus, Kazakhstan, Ukraine, Russia, Turkey, Uzbekistan.
