Take a quick glance at the composition of the Barclays global high-yield index - one of the most widely-used indices for tracking junk-rated bonds - and the proportion of emerging market debt doesn't look like it's moved all that much. A deeper dive shows a different picture, however, with emerging market debt accounting for a much greater portion of the index on a risk-adjusted basis. Taking into account things like spread and duration as well as the total amount of debt outstanding, emerging markets' contribution to the global index has jumped from 28 percent in 2012 to 40 percent today. Moreover, the preponderance of EM debt's risk-weighting in the index looks to be coming from downgrades rather than a simple jump in sales of the bonds.
Here are Barclays analysts led by Aziz Sunderji with some commentary and the relevant charts:
The growing source of EM in the index is “bad” (downgrades) rather than “good” (new issuance): whereas the reason for new EM debt entering the global high yield index in 2012 through 2014 was primarily new issuance, over the past year, the driver has been tilted toward downgrades (Figure 5). With constrained capital markets limiting new high yield issuance and some large segments such as Brazil and Turkey moving slowly toward high yield, this trend could continue.
In fact, say the Barclays analysts, the big jump in emerging market's risk-adjusted contribution to the index appears to come mostly from Russian debt - where both sovereign and corporate bonds have experienced a series of downgrades by major credit rating agencies in recent (tension-filled) months. The growing prevalence of EM debt in the index means that investors searching for yield in junk bonds need to tabulate a growing list of risk-reward calculations.
Those not only include the future direction of interest rates but also the next political move by Vladimir Putin.