The devastating earthquake and subsequent nuclear power crisis in Japan and the geo-political events in the Middle East and North Africa are pushing institutional investors towards fixed income in general, especially sovereign debt, says an expert from real-time analysis firm Informa Global Markets.
“The Japanese disaster on top of on-going geopolitical MENA unrest certainly heightened the demand for so called safe-haven assets, like sovereign debt and fixed income in general,” says Head of FI/FX/Emerging Markets, Europe for Informa Global Markets. “This is normal when a global ‘event’ of this size and with the potential to impact far beyond the country/region itself happens and the markets scale down risk positions amidst a broad deterioration in investor/spec sentiment, hence the ‘flight-to-quality’ and depending on how big the problem is that normally determines the speed of the scramble to switch from the assets, currencies, amongst others, deemed to be more risky and into more protected or Government-backed instruments.”
On Friday March 11, a massive earthquake that measured 8.9 on the Richter scale hit Japan. The quake hit off the North Eastern coast and caused a 10-metre-high tsunami to hit the coast.
Japan authorities reported there is a nuclear power emergency situation with four million homes without power, following the largest earthquake to hit Japan on record.
Furthermore, the tragedy, naturally, had a huge impact on the Japanese financial markets, which in turn has had repercussions on the global markets.
Meanwhile in the Middle East, geo-political unrest continues to hit Libya and Egypt.
“As contagion spreads in the MENA, we acknowledge that the region appears to be experiencing a “1989 moment”, while recalling that transition in the former Soviet empire has been protracted and multi-directional,” says Alastair Newton, senior political analyst and managing director at Nomura. “Yemen also continues to feel significant amounts of internal strife, which could lead to regime change over the intermediate term. Libya aside, we currently see no direct threat to oil/gas output. Nor do we see international military intervention in Libya necessarily as a precedent for similar action elsewhere in the region.”
“However, we acknowledge that potential disruption in oil/gas output in countries already experiencing protests, and/or contagion to as yet untroubled major oil producers, cannot be ruled out,” adds Newton. “We see no sign of contagion outside the MENA for now but do not rule out the possibility longer term.”
When asked whether the events, such as Japan, has infringed the potential bond returns in the wider global markets, whether sovereign or corporate, Baker says thatthere is certainly an element of relative performance within the Government and corporate bond markets.
“For example, there are some selective positioning and by that I mean sovereign debt from certain emerging market countries and lesser rated credits may lag any overall safe-haven rally if panic really sets in and only the core assets or those deemed the safest are sought out,” he adds.
However, despite this “flight to safety,” Baker warns that buying opportunities may not seem as overtly attractive.
“To be honest the safe-haven premium in many fixed income markets already prices in may not make them attractive when things get back to normal, indeed before all the latest events the macro fundamentals were bearish for bonds with the economic recoveries gathering momentum overall and more CBs looking to remove post-financial crisis/recession policy accommodation,” says Baker. “Certain CBs had been eyeing the removal or the unwinding of more non-standard easing measures where exit strategies already started, like QE or extra short term liquidity. Indeed, the Fed is still on course to end its $600 bn asset purchase programme, while the ECB looks ready to raise its benchmark rates.”