Sovereign defaults hit record levels during 2020 as the coronavirus pandemic and falling oil prices weakened credit quality. According to S&P Global Ratings, seven sovereigns defaulted during the year, having all begun 2020 rated “B” or lower.
- The IMF upgraded its economic growth forecasts
- The benchmark German bond yield continued to improve
- Interest in retail bond funds wavered during March
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Sovereign defaults hit record levels during 2020 as the coronavirus pandemic and falling oil prices weakened credit quality. According to S&P Global Ratings, seven sovereigns defaulted during the year, having all begun 2020 rated “B” or lower. The highest-rated sovereign to default during 2020 was Suriname (rated “B”); Ecuador and Belize were rated “B-“ at the beginning of the year; Zambia, Lebanon and Argentina were in the lowest-rated category of “CCC”/”CC”. Meanwhile, 26 sovereigns were downgraded over 2020; most were speculative-grade issuers from emerging or frontier markets. S&P reported that, by the end of 2020, there were seven sovereigns rated “CCC+” or below – the lowest rating levels – which suggests that default rates could remain “elevated” over the next few years.
“Policymakers will continue to face challenges from an uneven global recovery”
The International Monetary Fund (IMF) upgraded its forecast for economic growth amongst emerging markets and developing economies this year from 6.3% to 6.7%, and maintained its growth prediction for next year at 5%. The IMF also upgraded its forecasts for global expansion from 5.5% to 6% in 2021 and from 4.2% to 4.4% in 2022. However, the IMF warned that policymakers will continue to face challenges from an uneven global recovery and an increasing gulf between rich and poor. The IMF believes that “uneven recoveries are … occurring within countries as young and lower-skilled workers remain more heavily affected … Because the crisis has accelerated the transformative forces of digitalisation and automation, many of the jobs lost are unlikely to return”.
The yield on the ten-year US Treasury bond fell from 1.74% at the end of March to 1.65% at the end of April, having begun the year at 0.93% at the start of the year. Meanwhile, the yield on the benchmark German government bond continued its climb, ending April at -0.20% compared with -0.30% at the end of March and -0.56% at the beginning of 2021.
Investors’ interest in fixed-income funds wavered slightly during March, according to the Investment Association (IA), which reported a sharp increase of inflows into mixed asset funds and equity funds. In comparison, net retail inflows into bond funds fell from £1.4 billion to £1.03 billion. Although much of this decline was attributable to sizeable outflows from the £ Corporate Bond sector, the Global Bonds sector remained out of favour, experiencing outflows of £520 million during the month.
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