Chasing higher yields forces investors to assume more risk
The pursuit for higher yield and less risk in the local market
After the 2008 global financial crisis, monetary policymakers across the globe reduced interest rates to buffer their economies. Alongside declining cash rates, US bond yields have also been in a steady decline for the past four decades. This made the phrase “search for yield” popular among international investors, who had to scramble to find respectable income yields from developed market issuers. Emerging market instruments were never really in contention because they fell prey to pressure from risk-off environments and a stronger dollar.
SA, for example, offers relatively strong bond yields but risk appetite is so severely constrained that investors often fall back on their staple diet of US bonds — of which the 10-year yields are below 1%, a fraction of what is on offer in many emerging markets...