Since the beginning of the year, emerging market countries have issued about $29 billion in high-yield sovereign bonds, roughly in line with recent historical averages (Figure 1). However, given the higher financing needs of emerging market countries and the record volume of investment-grade sovereign bonds issued under the pandemic, this figure is not particularly large. Why is this happening?

First, fewer issuance of high-yield sovereign bonds actually means that emerging markets can get more financing opportunities from international financial institutions. Since the global outbreak of the pandemic, international financial institutions have rapidly sniffed out the vulnerability of developing countries in dealing with the impact of the pandemic and have increased their loans to developing countries dramatically. Among several countries in the EMBI Global Diversification Index, about 30% of developing countries have benefited from the support of these international financial institutions (Figure 2), receiving about $25 billion in pandemic relief loans and more than $20 billion in financing not directly related to the pandemic.

Second, issuers of high-yield bonds in emerging markets are more sensitive to risk sentiment and credit spreads. This is the reason for the differentiation in investment-grade and high-yield sovereign bond issuance. During the pandemic, credit spreads in the international market were still relatively large. As a result, some emerging market countries were unwilling to issue high-yield sovereign bonds in the international market, but instead used official sector support to replace international market issuance as much as possible. Therefore, the issuance of high-yield sovereign bonds in emerging markets is unlikely to accelerate as much as investment-grade sovereign bonds and developed-country corporate bonds.

Source: Fort Zhi