The rising prevalence of negative-yielding bonds, driven by monetary stimulus in Japan and Europe, is driving investors back into emerging markets, even as countries like Brazil and Russia languish in recessions, default rates rise and credit-rating downgrades pile up.
Bonds with yields below zero -- implying buyers are actually paying to lend money to borrowers -- now account for 18% of the total globally, more than double the proportion at the end of last year, according to Bank of America Merrill Lynch. As recently as mid-2014, the percentage rounded to zero.
As choices dwindle for bonds that still provide income, investors plowed $18.9 billion into emerging-market bonds in March, the highest reading since January 2015, according to the Institute of International Finance. That happened even as companies in the countries had their credit ratings cut at the fastest pace in at least five years, Bank of America Merrill Lynch said this week in a report.
The surge in demand comes as "global central banks continue to ease and yield disappears from the global fixed-income universe," Christopher Hays, an analyst at the bank, wrote in a report distributed Wednesday. "Investors reach for yield."
In January, Japan cut interest rates to minus 0.1%, in an effort to combat potential deflation, and in March the European Central Bank announced an expanded round of monetary stimulus. Switzerland and Denmark have cut rates below zero to ease upward pressure on their currencies, according to Moody's Investors Service, while Sweden has imposed negative rates to lift flagging inflation.
Partly as a result of the central banks' actions, so many investors jumped into emerging-market corporate bonds that they rallied 3.9% in the first quarter, surpassing Bank of America Merrill Lynch's forecast for returns for the entire year.
In 2015, jitters over tumbling crude-oil prices, an expanding corruption probe in Brazil and the prospect of a currency devaluation in China led investors to retreat from emerging-market assets.
That carried over into the first part of this year, but in March, assets from the countries rallied as commodity prices rebounded, buoying the prospects for countries that are big raw-materials exporters. Also, Federal Reserve Chair Janet Yellen suggested the central bank may be less aggressive than previously expected in raising interest rates, diminishing the prospect of more attractive yields this year in the U.S.
In Brazil, which is mired in a multi-year recession as President Dilma Rousseff faces impeachment calls, investment-grade corporate bonds returned 10% during March, according to Bank of America Merrill Lynch. In Colombia, total returns were 7.3%. Indian junk bonds returned 6.7%.
Emerging-market junk bonds now yield 0.1% more than similarly-rated securities in the U.S., versus the five-year average of 0.29%. That shrinking gap indicates investors are more willing to accept added risks of the countries, such as greater political turmoil, increased corruption, currency fluctuations and less-developed capital markets.