Emerging markets on track to set sovereign debt record

Low rates tempt governments from Argentina to Saudi Arabia to issue bonds

by: Elaine Moore

Developing economies are on course to raise a record sum on global debt markets this year, as ultra-low rates in the developed world cheapen borrowing costs for countries from Asia to South America.

After a slow start, governments in countries including Mexico, Qatar and Argentina have issued bonds worth $90bn in 2016. By the end of the year, credit strategists at JPMorgan expect sales of debt by emerging markets in “hard” currencies such as dollars and euros to reach more than $125bn — boosted by Saudi Arabia’s first appearance on global bond markets.

A punishingly low yield environment for money managers has sparked a jump in demand for emerging market fixed debt in the past few months, as lack of inflation keeps interest rates in big economies on hold and prompts additional monetary easing from the European Central Bank, the Bank of Japan and the Bank of England.
In the US, weak jobs data published on Friday have also pushed back expectations of the Federal Reserve raising interest rates this month, potentially removing a threat to the buoyancy of emerging market assets.

Record inflows of funds have in turn pushed up emerging market bond prices, reducing borrowing costs down and spurring an increase in debt sales.

Inflows into EM fixed income have surpassed other risky assets in the past two months, with investors pouring over $16bn into emerging market bond funds since the UK voted for Brexit.

While inflows have headed primarily to dollar-denominated bonds, local currency bonds — which expose investors to both credit risk and currency moves — have also seen an uplift in demand.

Zsolt Papp, head of emerging markets debt at JPMorgan Asset Management, said there remained scope for continued investment in emerging markets in the coming months, noting that countries including India and Turkey had lowered interest rates recently and that more might follow.

However, analysts at Bank of America Merril Lynch pointed out that the risks of a pullback in bond prices remained high. Not only are emerging markets an unbalanced and highly diverse group, but falling oil prices and a shift in risk appetite could quickly result in a sell-off.


Paradise Lost: Why the Good Times Are Over for Global Bonds

Government bond investors have had everything going right for them. That could never last forever.

By Richard Barley

The Bank of Japan has been inventive in monetary policy. Photo: Agence France-Presse/Getty Images

The global bond market has slipped its central-bank anchor. The days of bond nirvana, where seemingly every month brought lower yields—and higher prices—are over for now.

Until September, fixed-income investors had everything going their way. Global inflation has been quiescent, and global growth fragile. Central banks, particularly the Bank of Japan 8301 12.79 % and European Central Bank, have been ever-more inventive in monetary policy. And then June’s Brexit vote hammered yields lower as markets feared turmoil and expected more central-bank responses.

Ten-year bond yields turned negative in Japan and Germany. Even with the U.S. Federal Reserve looking to raise rates, U.S. Treasury yields fell sharply in the first eight months of the year. Long-dated bonds produced spectacular returns: By Aug. 12, U.K. gilts maturing in more than 25 years had returned nearly 39%, according to Bank of America Merrill Lynch indexes.

But the rally pushed bond valuations to extraordinarily stretched levels. And now the tide has turned: Long-dated bond yields have shot higher. Thirty-year U.S. Treasury yields have risen 0.23 percentage point in a week.

The move has its roots in Japan, as disappointment with BOJ inaction at the end of July caused a selloff in Japanese government bonds. Then markets were disappointed again by the European Central Bank last week. Now both the ECB and BOJ are working on potential changes to their policy mix: In both cases, investors fear they will be less supportive of long-dated bonds. That has global consequences: The rally in U.S. Treasurys was part of a global move; the backup is just the same. If it were fears around the Fed driving the market, it would be short- and intermediate-maturity bonds that would be suffering more.

Other supportive factors have faded. Brexit, while it may yet have profound long-term consequences, hasn't caused a new crisis. And headline inflation should rebound in coming months if oil prices remain in their current range. In economies where banks are the dominant suppliers of credit, steeper yield curves may be no bad thing and encourage lending, perhaps brightening the growth outlook. U.S. income data released Tuesday suggests consumers are well placed to spend.

There are still some powerful constraints on bond yields. Global growth remains uninspiring.

Regulation will continue to push banks and insurers into assets deemed to be safe. Central banks are unlikely to turn tail; the mix of policy may change, but it will remain loose, keeping short-dated bond yields low.

Fears about fiscal stimulus may be overdone: It will be a bold politician who challenges orthodoxy and ramps up borrowing in style. Geopolitical risk is high and the Brexit vote shows markets can get political outcomes badly wrong. A selloff in risky assets like equities, corporate bonds and emerging markets, themselves propelled higher by low bond yields, may generate demand for government bonds.

But at the margin, the environment for bonds is less friendly. Steeper yield curves are the result.

Bond yields can stay low by historical standards—just not as low as they have been.

Why the Rise in Wages Is Great News and a Problem

Seemingly positive economic news for the U.S. could actually portend a recession.

By George Friedman

I have been writing for a while about what I, and others, regard as the fundamental social and economic problem facing the United States: the crisis of the declining purchasing power of the middle and lower-middle class. I expect it to cause significant internal tension, which will to some extent be reflected geopolitically. The problem is not one of inequality. Historically, Americans have been comfortable with wide disparities of income.

The problem is the contraction of the purchasing power of those living at or below the median household income. As we calculated, the take-home pay for someone earning the median income, after taxes and other deductibles, and assuming health care from their employer, would run at about $3,600 a month and would be enough, at current interest rates, to purchase a house and a car and maintain them without savings. Someone at the lower-middle class level would be earning about $2,000 a month, after taxes and with employer-provided health care.

The lower-middle class would no longer be able to do more than rent an apartment.

The middle class had been able to buy a house a generation ago, but no longer. The middle class has lost all frills and with any greater deterioration of purchasing power would be priced out of the housing market as well.

That is why today’s news that the median income rose dramatically, by 5.2 percent between 2014 and 2015, is extremely important. It raises the possibility that the decline in income, and therefore purchasing power, has been reversed. With inflation in key commodities somewhat contained and income surging, this could be the reversal of a trend that has been going on for almost 20 years.

When you look at the chart, however, we have not yet had a breakthrough. Real median household income even after last year's reported increase is 1.6 percent lower than in 2007 and 2.4 percent lower than the peak in 1999. There has been no expansion – this is the first increase since 2007. It is not just a matter of having taken this long to recover, but that having taken so long, it is not clear that it is sustainable – indeed the surge indicates emerging problems.

In American post-World War II history, the time between recessions has averaged a little over six years. Between 1990 and 2008, recessions were more spaced out, but that period was one of the most prosperous and dynamic periods of the past 100 years. Since 2008, things have slowed down remarkably. Assuming that the time between recessions is now on a roughly seven-year cycle, we are due for a recession in a year or two.

One of the early markers of a recession is that economic indicators start surging. Increasing prices for various classes of products indicate an increasing shortage of those products, which indicates that the economy is reaching a structural limit. The illusion sets in that we have reached a new normal, that traditional rules don’t apply and that the business cycle has been abolished. This is what Alan Greenspan called “irrational exuberance” just before the economic breaking point that signals a crisis initiating a recession.

The startling extent of the growth in wages, strikingly outpacing the rest of the economy, strikes me as a classic sign of the end of a cycle. In this case it is not housing or dot-coms that have surged without clear economic justification, but wages. With unemployment reported at 4.9 percent by the Bureau of Labor Statistics, the rapid growth of wages in 2015 seems, on first impression, as representing a structural shortage of labor. Businesses expecting the current expansion to continue are buying labor at higher prices, but regardless of how high the price is, the type of labor needed to maintain the expansion is not there. The economy will decline and wages will sharply return to at least prior levels.

It would be good for individuals if there were no recessions. But the business cycle is essential to a healthy economy. Without a slowdown, irrationalities and inefficiencies that creep into an expanding economy grow and eat away at the economy. Of course they are precisely the thing that makes a recession inevitable. Economies in which the state avoids recessions, or at least marked slowdowns, tend to create long-term problems. So recessions are necessary, as pruning is to plants.

My view at this point is that rather than celebrating this much needed increase, it should be taken as a warning sign of an overheated economy. Rather than concluding that a long-term and significant problem has been reversed, we need to read this as a troubling episode in that crisis. As we have seen, once dot-coms or residential home prices crash, it takes a while for their prices to rise. They may not reach prior values for a long time. If that is the case here, then the result could be lower wages for a long time.

From my point of view, wages and growth must at least track. We have had poor growth since 2008, and wages since then have very roughly reflected that. Prior to 2008, growth outstripped wage growth. So the middle class and below missed out on the pre-2008 growth, but suffered the worst of the post-2008 world. Now wages are outstripping growth. If growth picks up dramatically I will change my mind, but at this point, these numbers worry me more than they delight.

The Unexpected Ways Sleep Deprivation Makes Life Tougher

People who haven’t slept enough have a harder time accurately reading emotions and related problems

By Andrea Petersen

Scientists are gaining new insights into just how lack of sleep can upset our emotional equilibrium.

Researchers have found that people who are sleep-deprived have difficulty reading the facial expressions of other people, particularly when the expressions are more subtle. They are less able to discern, for example, whether a spouse is annoyed or just serene.

People also are less emotionally expressive when they haven’t gotten enough sleep. They smile less, for example, even when they feel something is funny. Using neuroimaging, scientists are discovering certain patterns of brain activity that may be behind the emotional volatility that can be caused by lack of sleep.

“Few things come unhinged as quickly and profoundly as our emotional stability…when we are not getting enough sleep,” says Matthew Walker, professor of neuroscience and psychology at the University of California, Berkeley. Fatigue-induced misinterpretations and miscues can wreak havoc on relationships.

Experts generally recommend that healthy adults get between seven and nine hours of sleep a night. But more than one-third of U.S. adults say they sleep less than seven hours a night on average, according to data from a 2014 survey of more than 444,000 people analyzed by the Centers for Disease Control and Prevention. Nearly 12% of respondents said they slept five hours or less a night.

In one 2014 study published in Experimental Brain Research, 49 healthy young adults were divided into two groups. One spent a night without any sleep, while the other was able to sleep normally.

The next day, the subjects were presented with images of faces that varied in the degree of emotional expression. The sleep-deprived subjects were much slower at identifying the emotions in all types of faces and were less able to accurately identify the sad faces.

Other studies have found that sleep-deprived people are less able to accurately identify angry and happy faces, too, particularly when the expressions are subtle. While many sleep deprivation studies have subjects go without an entire night of sleep, scientists say the results likely are applicable to the more real-world experience of chronically getting an insufficient amount of shut-eye.

Sleep deprivation can have public-safety implications, says Namni Goel, a sleep researcher at the University of Pennsylvania Perelman School of Medicine. Military personnel and police officers, she notes, often face situations where they need to accurately interpret the facial expressions—and motivations—of others.

“If you are slower to identify what is happening and that is coupled with what we know, that you become more impulsive when sleep-deprived and risk-taking goes up, that can have deadly consequences,” Dr. Goel says.

David F. Dinges, a professor in the psychiatry department at Penn, has scientific evidence that sleep-deprived people tend to overreact to minor things.

In one 2012 study, he and colleagues had one group of subjects go without sleep for one night; the other slept normally. The next day the participants did a series of tasks, including math problems. Some were easy and others more difficult. They also received feedback on their performance—sometimes it was positive and other times negative.

After completing the difficult math problems with negative feedback, both groups reported being about equally stressed, angry, anxious and depressed. But after the easy problems, the sleep-deprived subjects had higher levels of stress, anger and anxiety than those in the rested group.

“Sleep deprivation lowers your threshold for stress. You’re basically less able to emotionally cope with it. That would explain rage responses to small things,” Dr. Dinges says.

Catherine Shearon finds that on days when she’s gotten under six hours of sleep the night before, she’s more irritable and on edge. “I’m sharp with people and impatient,” says the 54-year-old from Ottawa, who works in educational sales and is also a part-time personal trainer.

Little annoyances—like forgetting her toothbrush on a trip—can become “catastrophic,” she says.

In neuroimaging studies, scientists have discovered that sleep deprivation can amplify activity in the amygdala, a part of the brain that plays a key role in processing emotions, and weaken activity of the prefrontal cortex, which is critical for regulating emotions.

Dr. Walker at Berkeley has found that when sleep-deprived subjects are shown disturbing images—like tarantulas or homes on fire—while in an MRI scanner, their amygdalae are 60% more reactive, compared with the amygdalae of people who aren't sleep-deprived and seeing the same pictures. This amygdala hyper-reactivity can start to occur at about 6½ hours of sleep or less, he says. REM sleep in particular appears to be critical for processing emotional experiences.
“I’ve called this overnight therapy,” Dr. Walker says.

Most research has focused on sleep deprivation’s negative impact on cognition and performance. This is of particular concern for the military and industries like medicine, trucking and aviation.

Some people weather sleep loss much better than others. Researchers also don’t know how long it takes to recover from the negative emotional effects of sleep loss.