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Emerging markets will remain turbulent as US interest rates rise.
The Bank for International Settlements (BIS) quarterly Published today contains important quantitative and qualitative information indicating a turbulent path not only for banks but also for a wide range of financial institutions and investors around the world. In the near future, the two areas to watch more closely are the continued rise in the issuance of corporate debt globally, in particular by emerging market debt issuers. rate increases on all corporate borrowers, but especially those in emerging markets.
After sixteen months of consecutive inflows into emerging markets, the trend reversed in May. Emerging markets have been affected by their own fiscal, political and corporate debt challenges, as well as the significant effect of rising US interest rates and escalating trade tensions.
The vertical lines in the left and right panels indicate February 2, 2018 (the report on the US labor market triggers nervousness), April 20, 2018 (Argentina intervenes to support the peso) and August 1 2018. Turkey). The dotted lines in the right pane indicate simple averages for the period January 2010 to December 2017. 1 Trade-weighted dollar indexes, Board of Governors of the Federal Reserve System; an increase indicates an appreciation. 2 major currencies (AUD, CAD, CHF, EUR, GBP, JPY and SEK). 3 Other major trading partners (ARS, BRL, CLP, CNY, COP, HKD, IDR, ILS, INR, KRW, MXN, MYR, PHP, RUB, SAR, SGD, THB and VES). 4 Difference between the trade – weighted dollar index for other major trading partners and major currencies. 5 The EM-8 Carrying Index, which measures the cumulative total return of a long buy-and-hold carry position across eight EME currencies and fully funded by short USD positions. 6 Mixed money market funds invest in both local currency and hard currency bonds. 7 JPMorgan GBI index; spread over seven-year US Treasury securities. 8 indices JPMorgan EMBI Global (sovereign) and CEMBI (companies); flayed
Sources: Federal Reserve Bank of St. Louis (FRED); Bloomberg; EPFR; JPMorgan Chase; BIS calculations.Bank of International Settlements
Sign that China's growth rate is slowing emerging markets and should continue to do so in the near future. Emerging market currencies are now much more sensitive to renminbi movements. As China continues to grow in the financial markets, investors will see an even greater sensitivity to the renminbi, not only in emerging markets, but also in advanced economies.
1 Correlations between daily exchange rate movements of the local currency and the renminbi against the US dollar over the periods indicated; the aggregates are based on the medians in the different currencies of each region.
Sources: Bloomberg; BIS calculations.Bank of International Settlements
Examining the divergence in market performance between the rise in US financial markets and the pressure on emerging markets in recent months, Mr Claudio BorioThe head of the monetary and economic department of the BIS said that "the global financial markets continue to perform well." However, "the average was not particularly significant. It was a bit like that proverbial person whose temperature, on average, was fine except that their head was on fire and their feet frozen.
For adverse events, except the United States and emerging countries, except CN, simple average of stock indexes from one country to another. Source: Bloomberg; Data flow; BIS calculations.Bank of International Settlements
There is a concern that US dollar loans to non-bank residents in emerging markets have more than doubled to about $ 3,700 billion since the financial crisis. Borio said that these balance sheet figures included no borrowing in dollars through currency swaps, which could easily be of a similar order of magnitude. This significant increase is part of the overall credit expansion to non-banks – a key indicator of global liquidity, which rose from 33% to 38% of global GDP between the first quarters of 2015 and 2018. "
1 Excludes Russia from the reporting countries. 2 Excludes countries in the euro area from counterpart countries. 3 International Debt Securities (IDS) refers to debt securities by residence and the immediate area of the issuer; all instruments all deadlines; non-bank issuers.
Sources: Dealogic; Euroclear; Thomson Reuters; Xtrakter Ltd; BIS banking statistics and global liquidity indicators; BIS calculations.Bank of International Settlements
Rather than resorting to bank loans, the overall extension of credit takes the form of debt issuers. This is likely because, after the crisis, US, and especially European, banks rediscovered the religion of credit risk and lent less to strengthen their capital to cover their weighted assets. In addition, from 2013, the banks of the 27 member countries of the Basel Committee on Banking Supervision started to apply the Basel III capital requirements,
More information on the BIS global liquidity indicators is available at www.bis.org/statistics/about_gli_stats.htm.
1 Cross-border loans and local loans in foreign currency to non-bank borrowers. 2 per residence and immediate area of the issuer; all instruments all deadlines; non-bank issuers. International debt securities are debt securities issued by non-banks in a market other than the local market of the borrower's country of residence.
Sources: Dealogic; Euroclear; Thomson Reuters; Xtrakter Ltd; BIS banking statistics and global liquidity indicators; BIS calculations; authors' calculations.Bank of International Settlements
In addition, banks sell their leveraged loans, some through secured loan obligations. As there has been a very enthusiastic investor base, the pursuit of returns, borrowing and commitments from CLO have weakened. According to the BIS quarterly data, the average number of covenants per loan decreased by 25%. Borio said that "prices often had to be adjusted upward to clear the market after the preliminary auctions." In addition, the attractiveness of floating rate loans was irresistible as investors sought to increase bond yields and avoid potential losses. The prospect has undoubtedly been reinforced by the important fiscal stimulus that came so late in the expansion. "
1 For institutional leveraged loans, outstanding amounts are based on the S & P / LSTA leveraged loan index for the United States and the European leveraged loan index S & P for Europe where LSTA = Loan Syndications and Trading Association; for high-yield bonds (HY), outstandings are based on the ICE BofAML high-yield index in US dollars for the United States and the high-yield ICE BofAML index in euros for the United States. ;Europe. 2 Based on US market offers. Sources: ECB; ICE BofAML indices; Lipper Thomson Reuters Loan Pricing Corporation; BIS calculations.Bank of International Settlements
As the Federal Reserve continues to raise rates in the normalization process, companies, which record record levels of debt globally, will feel the pain of rising borrowing costs. . Those borrowing in US dollars will feel this pain more strongly as the dollar continues to rise due to rising interest rates and currently strong US economic fundamentals. No one knows how long and how painful the withdrawal symptoms will be, as businesses and investors alike will learn to live in an environment of rising rates after a prolonged period of low interest rates.
In 2008, banks and non-banks such as Lehman and Bear Sterns were at the epicenter of the crisis. For the next crisis, we need to take a closer look at insurance companies, asset managers and other parallel financial institutions. While global debt issues have increased, the bank holdings of this debt have risen from 40% of total outstanding in 2008 to 27% by the end of March 2018. Banks have reduced their holdings due to combination of the above Basel III requirements; in the United States Dodd-Frank's Volcker rule also had an effect on the bank bond inventory. With the exception of insurance companies, other financial institutions did not have these types of requirements that allowed them to invest in corporate debt securities as well as secured loan obligations, bonds and bonds. Many of these loans are covenenat-lite, which means that the holders of these loans, whether direct holders or CLOs, have much less credit protection than after the crisis.
Secured loan obligations and loans facilitate the demand. "US CLO" covers issues denominated in USD and "Europe CLO" issues denominated in EUR; "Loan funds" include exchange-traded funds and cover funds domiciled in the United States and Europe. Sources: ECB; ICE BofAML indices; Lipper Thomson Reuters Loan Pricing Corporation; BIS calculations.Bank of International Settlements
Fortunately, fewer CLOs are on bank balance sheets, but long-term investors, such as insurance companies, pension funds and asset managers, have increased their investments in CLOs. The default rate of leveraged loans rose from around 2% in mid-2017 to 2.5% in June 2018. In contrast to banks, many long-term investors such insurance and pension funds tolerate pain less well. If they start selling CLOs aggressively during a downturn in the market, this could dramatically increase market volatility.
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Emerging markets will remain turbulent as US interest rates rise.
The Bank for International Settlements (BIS) quarterly Published today contains important quantitative and qualitative information indicating a turbulent path not only for banks but also for a wide range of financial institutions and investors around the world. In the near future, the two areas to watch more closely are the continued rise in the issuance of corporate debt globally, in particular by emerging market debt issuers. rate increases on all corporate borrowers, but especially those in emerging markets.
After sixteen months of consecutive inflows into emerging markets, the trend reversed in May. Emerging markets have been affected by their own fiscal, political and corporate debt challenges, as well as the significant effect of rising US interest rates and escalating trade tensions.
The vertical lines in the left and right panels indicate February 2, 2018 (the report on the US labor market triggers nervousness), April 20, 2018 (Argentina intervenes to support the peso) and August 1 2018. Turkey). The dotted lines in the right pane indicate simple averages for the period January 2010 to December 2017. 1 Trade-weighted dollar indexes, Board of Governors of the Federal Reserve System; an increase indicates an appreciation. 2 major currencies (AUD, CAD, CHF, EUR, GBP, JPY and SEK). 3 Other major trading partners (ARS, BRL, CLP, CNY, COP, HKD, IDR, ILS, INR, KRW, MXN, MYR, PHP, RUB, SAR, SGD, THB and VES). 4 Difference between the trade – weighted dollar index for other major trading partners and major currencies. 5 The EM-8 Carrying Index, which measures the cumulative total return of a long buy-and-hold carry position across eight EME currencies and fully funded by short USD positions. 6 Mixed money market funds invest in both local currency and foreign currency bonds. 7 JPMorgan GBI index; spread over seven-year US Treasury securities. 8 indices JPMorgan EMBI Global (sovereign) and CEMBI (companies); flayed
Sources: Federal Reserve Bank of St. Louis (FRED); Bloomberg; EPFR; JPMorgan Chase; BIS calculations.Bank of International Settlements
Sign that China's growth rate is slowing emerging markets and should continue to do so in the near future. Emerging market currencies are now much more sensitive to renminbi movements. As China continues to grow in the financial markets, investors will see an even greater sensitivity to the renminbi, not only in emerging markets, but also in advanced economies.
1 Correlations between daily exchange rate movements of the local currency and the renminbi against the US dollar over the periods indicated; the aggregates are based on the medians in the different currencies of each region.
Sources: Bloomberg; BIS calculations.Bank of International Settlements
Examining the divergence in market performance between the rise in US financial markets and the pressure on emerging markets in recent months, Mr Claudio BorioThe head of the monetary and economic department of the BIS said that "the global financial markets continue to perform well." However, "the average was not particularly significant. It was a bit like that proverbial person whose temperature, on average, was fine except that their head was on fire and their feet frozen.
For adverse events, except the United States and emerging countries, except CN, simple average of stock indexes from one country to another. Source: Bloomberg; Data flow; BIS calculations.Bank of International Settlements
There is a concern that US dollar loans to non-bank residents in emerging markets have more than doubled to about $ 3,700 billion since the financial crisis. Borio said that these balance sheet figures included no borrowing in dollars through currency swaps, which could easily be of a similar order of magnitude. This significant increase is part of the overall credit expansion to non-banks – a key indicator of global liquidity, which rose from 33% to 38% of global GDP between the first quarters of 2015 and 2018. "
1 Excludes Russia from the reporting countries. 2 Excludes countries in the euro area from counterpart countries. 3 International Debt Securities (IDS) refers to debt securities by residence and the immediate area of the issuer; all instruments all deadlines; non-bank issuers.
Sources: Dealogic; Euroclear; Thomson Reuters; Xtrakter Ltd; BIS banking statistics and global liquidity indicators; BIS calculations.Bank of International Settlements
Rather than resorting to bank loans, the overall extension of credit takes the form of debt issuers. This is likely because, after the crisis, US, and especially European, banks rediscovered the religion of credit risk and lent less to strengthen their capital to cover their weighted assets. In addition, from 2013, the banks of the 27 member countries of the Basel Committee on Banking Supervision started to apply the Basel III capital requirements,
More information on the BIS global liquidity indicators is available at www.bis.org/statistics/about_gli_stats.htm.
1 Cross-border loans and local loans in foreign currency to non-bank borrowers. 2 per residence and immediate area of the issuer; all instruments all deadlines; non-bank issuers. International debt securities are debt securities issued by non-banks in a market other than the local market of the borrower's country of residence.
Sources: Dealogic; Euroclear; Thomson Reuters; Xtrakter Ltd; BIS banking statistics and global liquidity indicators; BIS calculations; authors' calculations.Bank of International Settlements
In addition, banks sell their leveraged loans, some through secured loan obligations. As there has been a very enthusiastic investor base, the pursuit of returns, borrowing and commitments from CLO have weakened. According to the BIS quarterly data, the average number of covenants per loan decreased by 25%. Borio said that "prices often had to be adjusted upward to clear the market after the preliminary auctions." In addition, the attractiveness of floating rate loans was irresistible as investors sought to increase bond yields and avoid potential losses. The prospect has undoubtedly been reinforced by the important fiscal stimulus that came so late in the expansion. "
1 For institutional leveraged loans, outstanding amounts are based on the S & P / LSTA leveraged loan index for the United States and the European leveraged loan index S & P for Europe where LSTA = Loan Syndications and Trading Association; for high-yield bonds (HY), outstandings are based on the ICE BofAML high-yield index in US dollars for the United States and the high-yield ICE BofAML index in euros for the United States. ;Europe. 2 Based on US market offers. Sources: ECB; ICE BofAML indices; Lipper Thomson Reuters Loan Pricing Corporation; BIS calculations.Bank of International Settlements
As the Federal Reserve continues to raise rates in the normalization process, companies, which record record levels of debt globally, will feel the pain of rising borrowing costs. . Those borrowing in US dollars will feel this pain more strongly as the dollar continues to rise due to rising interest rates and currently strong US economic fundamentals. No one knows how long and how painful the withdrawal symptoms will be, as businesses and investors alike will learn to live in an environment of rising rates after a prolonged period of low interest rates.
In 2008, banks and non-banks such as Lehman and Bear Sterns were at the epicenter of the crisis. For the next crisis, we need to take a closer look at insurance companies, asset managers and other parallel financial institutions. While global debt issues have increased, the bank holdings of this debt have risen from 40% of total outstanding in 2008 to 27% by the end of March 2018. Banks have reduced their holdings due to combination of the above Basel III requirements; in the United States Dodd-Frank's Volcker rule also had an effect on the bank bond inventory. With the exception of insurance companies, other financial institutions did not have these types of requirements that allowed them to invest in corporate debt securities as well as secured loan obligations, bonds and bonds. Many of these loans are covenenat-lite, which means that the holders of these loans, whether direct holders or CLOs, have much less credit protection than after the crisis.
Secured loan obligations and loans facilitate the demand. "US CLO" covers issues denominated in USD and "Europe CLO" issues denominated in EUR; "Loan funds" include exchange-traded funds and cover funds domiciled in the United States and Europe. Sources: ECB; ICE BofAML indices; Lipper Thomson Reuters Loan Pricing Corporation; BIS calculations.Bank of International Settlements
Fortunately, fewer CLOs are on bank balance sheets, but long-term investors, such as insurance companies, pension funds and asset managers, have increased their investments in CLOs. The default rate of leveraged loans rose from around 2% in mid-2017 to 2.5% in June 2018. In contrast to banks, many long-term investors such insurance and pension funds tolerate pain less well. If they start selling CLOs aggressively during a downturn in the market, this could dramatically increase market volatility.
