The paper, written by Tomasz Orpiszewski for Axa IM’s research team, assumes that private foreign investors, domestic banks and investment funds will likely reduce their exposure as yields increase or global risk aversion returns, whereas foreign central banks and pension and insurance funds – those seeking a safety net – will not.
The first 10 years of the euro, understandably, saw strong demand for euro-denominated bonds, it said. In the wake of the sovereign debt crisis, foreign investors held 70% of Greek and Portuguese debt, 60% of Irish and 60% of Italian debt with a huge sell-off between 2009 and 2011.
Emerging economies that have attracted the biggest bond inflows are those that have reduced their external vulnerabilities, hoarded FX reserves and kept debt low.
Orpiszewski said: “If we assume that the global healing scenario continues without intense risk-on, risk-off fluctuations, countries most likely to benefit from inflows into bond markets are those with high projected GDP and credit growth – Turkey, Brazil, Mexico, India, and Poland.”
The paper recognised that the interdependency between banks and sovereigns posed a serious threat to countries with high public or private debt overhangs, pointing to the IMF’s warning of having too much exposure to banks in peripheral Europe and Japan which might not survive another wave of turbulence.
