2021 is expected to be a challenging year for lower-rated sovereigns. There were six sovereign defaults during 2020 – Argentina, Belize, Lebanon, Ecuador, Suriname, and Zambia – and S&P Global Ratings predicts further defaults amongst low- and middle-income sovereigns.
- The UK and EU reached a post-Brexit trade deal
- A coronavirus relief package was signed into law in the US
- The US ten-year Treasury bond yield halved over 2020
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2021 is expected to be a challenging year for lower-rated sovereigns. There were six sovereign defaults during 2020 – Argentina, Belize, Lebanon, Ecuador, Suriname, and Zambia – and S&P Global Ratings predicts further defaults amongst low- and middle-income sovereigns as Covid-19 forces countries’ leaders to concentrate on programmes to support their populations’ social needs at a time when they are ill equipped to continue servicing their debt. Many lowly rated sovereigns suffer from high debt and high interest burdens, weak public finances, and often have “narrow” economic bases that are concentrated on one key industry, often commodities.
“The IA Global Bonds sector will be split into 14 new sectors”
The news that the UK and EU had finally reached a post-Brexit trade deal – with days to spare before the end of the transition period – provided a boost for sentiment. Concerns over the possibility of no deal sent the yield on the ten-year German government bond as low as -0.63% during December, but overall, it ended the month higher, edging up from -0.59% to -0.56%.
Investors welcomed the news that President Donald Trump had finally signed into law a US$900 billion coronavirus relief package, despite disagreeing with the terms. The ten-year US Treasury bond yield rose from 0.84% to 0.93% during December, rising as high as 0.97% early in the month. In comparison, it began 2020 at 1.92% before the spread of the coronavirus pandemic, more than halving over the year.
The onset of the coronavirus pandemic proved tough for bond funds, according to the Investment Association (IA), which reported that fixed income funds experienced outflows of £7.5 billion in March as investors opted to take cash from bonds rather than crystallising losses caused by plummeting share prices. Nevertheless, interest in bonds subsequently recovered, and bonds enjoyed the largest inflows of any asset class over the year to October, with global bond funds particularly in demand.
The IA also announced that the IA Global Bonds sector will be split into 14 new sectors in order to ensure they remain relevant. The division will take place in April 2021 and will result in the following new sectors: USD Government Bond; EUR Government Bond; Global Government Bond; Global Inflation Linked Bond; USD Corporate Bond; EUR Corporate Bond; Global Corporate Bond; USD Mixed Bond; EUR Mixed Bond; Global Mixed Bond; USD High Yield Bond; EUR High Yield Bond; Global High Yield Bond; Specialist Bond.
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