Global debt flows: The big mend continues

Seven things learnt from latest flows data

1)    Following a dramatic emerging markets outflows process and large price falls as the Covid-19 crisis unfolded, there have been some resumed inflows seen in recent weeks. Most of this has been into hard currency product.

2)    Retail remains a seller of EM local currency and was the biggest seller here when the pressure first built in March. There is evidence of flows back into Turkey and S Africa, but no clear evidence of inflows to Brazil; allocation there also remains down.

3)    Not only was there a classic elevation in default risk in high yield as economies jumped to a recessionary state, but the collapse in the oil price was an additional stress factor in this space. Hence the prior outflows seen in high yield.

4)    However fast forward to more recent weeks and there has been an implied re-rating of prospects in the high yield space, and in particular in the USD space where the prior stress was most elevated.

5)    Too early to tell whether this is a sustainable inflow process, as default risk remains elevated and will become more acute beyond September when most of the Fed’s support facilities are due to be taken off the shelf.

6)    There has been an increase in holding of short duration governments and money market funds, and an increase in corporate holdings right along the maturity spectrum, but especially in the medium-to-longer maturities.

7)    Overall in the past three months there has been an increased in holdings of bonds generally, both governments and corporates. But holdings of inflation linked bonds are well down and remain down.