Emerging market dollar bonds have struggled over the past month, but those in frontier markets have typically fared much worse. Of course, risky assets in general have sold off amid fears of a global trade war. Among frontiers, spreads have ballooned in Venezuela as the country teeters on the brink of an outright default. But one common theme is growing concerns over the sharp rise in sovereign dollar debt issuance in recent years. Indeed, some of the largest widening of spreads have come in those countries, such as Bahrain and Oman, which have been among the most prolific issuers of dollar bonds.
We expect frontier dollar bonds will continue to suffer over the next 6-12 months. The Federal Reserve is likely to raise interest rates by more than most anticipate, pushing up risk-free yields. And, as the global economy starts to slow next year, risky assets will come under pressure, causing spreads to widen further.