Which are the countries with the highest 10-year bond yields today? Any book or article on long-term investing will usually suggest diversifying a portfolio and allocating a certain portion of it towards bonds, particularly government bonds. Government bonds, similar to corporate bonds, allow governments to borrow money from markets. In turn, people or companies can buy these bonds, lending money to a government and expect to protect their money from inflation, and obtain some income through investing in a relatively less risky securities.
There are various types of government bonds, but usually most of them entitle the investor to periodic interest payments and the return of the principal amount once the maturity date of the bond expires. Governments that issue bonds usually specify the amount and the coupon (interest) and then auction them off. Once on the market, bonds change hands repeatedly and because the bond price fluctuates based on the market demand while the coupon stays the same, investors can get higher or lower profits from their bonds. For example, if an investor buys a bond that has a par value of $1,000 (he lends $1,000 to the government) and an annual coupon rate of 5%, he gets $50 every year in interest and then the whole $1,000 amount once the bond reaches maturity. However, if the investor decides to sell the bond for $800, the person who bought the bond would receive the same $50 per year, but because he paid only $800 for his bond, his rate of return will be 6.25% instead of 5% ($50/$800).
So, it might look like a good deal for someone to get a bond at a price below par and generate a higher rate of return. Except that it is not. Because the supply for bonds is unchanged or almost unchanged, the price is driven mainly by demand. So, if a bond’s price decreases, it means that there is less demand for these bonds. In turn, this suggests that investors are less interested in buying the bonds of the respective country. This could be because of some economic uncertainty that might suggest that the government might not be able to repay back the debt once it reaches maturity. Inflation is another factor that affects yields and if the expectations for inflation are high, the bond yields are also driven higher, as investors expect to be get a higher rate of return. Higher inflation can also be a sign of economic turmoil.
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The opposite is also true, which is why many wealthy countries will usually have very low bond yields contrary to the countries with the highest 10-year bond yields today.
If investing in government bonds seems to complicated, there are other instruments that allow exposure to government debt: Exchange-Traded Funds (ETFs). ETFs are publicly traded on the stock market and their return replicates the one of the bonds that they hold in their portfolio. Investing in a bond ETF has many advantages, such as an easy access to buy them, which can be done through most brokerage accounts. In addition, many ETFs hold a basket of different bonds, so the investor can diversify his exposure to bonds of different countries, or to bonds with different maturities. For example, the Vanguard Long-Term Bond ETF (NYSEARCA:BLV) provides exposure to US corporate and government bonds with maturities of at least 10 years. US bonds amass over 89% of the Vanguard Long-Term Bond ETF (NYSEARCA:BLV)’s portfolio, but it also holds Canadian, Mexican, Dutch, and other countries’ bonds. For more international exposure, one might consider the Vanguard Total International Bond ETF (NYSEARCA:BNDX), which offers exposure to foreign government and corporate bonds and includes Japan, France, Germany, Italy, and the United Kingdom among the issuing countries. The Vanguard Long-Term Bond ETF (NYSEARCA:BLV) contains around half of corporate bonds, while the Vanguard Total International Bond ETF (NYSEARCA:BNDX) includes 71% government bonds. For more ideas on ETFs that offer exposure to various bonds, take a look at our list of 11 biggest fixed income ETFs in the US.
In the US, the 10-Year Treasury note is one of the most important debt securities and its yield is watched closely. The 10-Year Treasury yield is considered a metric that shows the confidence that investors have in economic growth and is taken into account by the Federal Reserve when it makes its decision to change the fed funds rate. Around the world, the 10-year Treasury note is the most popular debt instrument, because it is backed by the US economy, which is considered the strongest in the world, so it carries almost no risk. In many cases, the yield for the 10-year Treasury note is taken as the risk-free rate, which is used in various formulas, such as the Capital Asset Pricing Model.
Taking everything said earlier into account, it won’t come as a surprise that the 10 countries with the highest 10-year bond yields today are far from being very economically stable. Let’s take a look at the list and see the developments that have pushed these countries’ 10-year yields so high.
10. India
10-Year Yield: 6.59%
With the inflation growing in India, its 10-year bond yield has also gained some ground in the last couple of months, although during the first five months of 2017, the 10-year yield hovered closer to 7%. India remains one of the fastest-growing economies in the world, which is also driving its inflation higher. In August, India CPI advanced by 3.36% on the year, while the Reserve Bank of India targets a medium-term inflation rate of 4%. In the last four quarters, India’s economic growth has shown signs of slowdown amid a growing rupee hurting exports. With hurting exports, India’s trade deficit is widening, which can further raise the inflation rate. To address these issues, the Reserve Bank of India has cut interest rates earlier this year.
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9. Mexico
10-Year Yield: 6.84%
We are continuing our list of countries with the highest 10-year bond yields today – for the first half of the year, Mexico’s 10-year bond yield was well above 7%, but slid below this mark in June. In the first half of August, Mexico hit an inflation rate of 6.59%, the highest in the first half of any month since June 2001. The Bank of Mexico has been consistently increasing interest rates, but in August left them unchanged at 7%. Inflation is expected to remain above 6% in the following months, but the central bank expects that it has reached its peak and will return to the target 3% by the end of 2018.
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8. Russia
10-Year Yield: 7.58%
Due to its dependency on oil, Russian economy was hit hard by the drop in oil prices. With the economic sanctions and a declining currency that led to an outflow of capital, the Russian economic growth slowed down to 0.7% in 2014, when the first round of sanctions was imposed over the Russian invasion of Crimea, and the GDP declined by 2.8% in 2015. At the same time, inflation rate amounted to 7.8% in 2014, 15.5% in 2015 and 7% in 2016. In turn, this sent the bond yields rallying. The Russian 10-year bond yield has surged above 10% towards the end of 2014 and reached a high of 15.9% in December. However, since then, the Russian ruble has been gaining ground and it is expected that the inflation will reach the central bank’s 4% target soon, in addition to central bank’s signals that it would further reduce interest rates.
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7. Pakistan
10-Year Yield: 8.2%
Number 7 on our list of countries with the highest 10-year bond yields today is Pakistan, a country that is usually overlooked by foreign investors and doesn’t have a great reputation overall. However, the Pakistani stock market has showed a 46% growth in 2016 and its GDP growth has been over 4%, which might not be as good as other emerging markets, but it still shows positive developments. The inflation in Pakistan is a bit high at 3.4% registered in August, but the government is confident that it will be able to manage it. However, the country is still facing many issues that affect its development, such as poor education system, weak exports that mainly include textiles and problems with weather and drought.
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6. South Africa
10-Year Yield: 8.4%
Since the beginning of 2016, the 10-year bond yield in South Africa has been declining from 9.6% amid slowing inflation. Last month, the inflation in the country reached 4.6%, the lowest point since September 2015. With lower inflation, the South African Reserve Bank cut the interest rates for the first time in five years. The benchmark repo rate was reduced by 25 basis points to 6.75%. With inflation showing signs of slowdown, it is expected that the central bank will further reduce interest rates in an attempt to boost growth.
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5. Brazil
10-Year Yield: 9.78%
On the fifth spot in the list of 10 countries with the highest 10-year bond yields today is Brazil. At the beginning of 2016, the 10-year yield on Brazil government bond reached a staggering 16.76%. Since then it has been mostly declining and just recently dropped below 10%. The largest economy in Latin America was plagued by one of its worst recessions in 2016, when its inflation reached 10.71%m the highest in 12 years, but it managed to decline quickly and reached 3.6% in June and is expected to remain around 3.5% this year. However, the country remains in political turmoil, with the impeachment of former president Dilma Rousseff last year. The current president Michael Temer has also been indicted in the Supreme Court on allegations of corruption. The potential political crisis could affect the growing investor optimism about Brazil.
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4. Venezuela
10-Year Yield: 10.43%
Venezuela has been a lot in the news lately, as the country is being battered by one of the worst economic crises in its history, which in turn led president Nicolas Maduro to aggressively seize power by overtaking control of the government and imprisoning political opponents, while also facing growing street protests over food shortages. The economic crisis sparked by the drop in oil prices, led to inflation surging to 460% over the last 12 month. The IMF estimates that the inflation will hit 700% this year. This of course led to a surge in bond yields, with the 1-year yield amounting to almost 50%. You’re probably wondering why is Venezuela on the list of countries with the highest 10-year bond yields today? Well, the 10-year yield has been holding steady at around 10.5% falling from over 12% a year earlier.
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3. Turkey
10-Year Yield: 10.5%
Turkey’s 10-year bond yield has been well above 10% for the largest part of 2017, touching 11.62% in January, what put it on our list of countries with the highest 10-year bond yields today. The country registered economic growth of 2.1% in the second quarter, but its core inflation rate (which excludes energy, food, alcohol, tobacco, and gold) reached 10.2% in August, well above the central bank’s target of 8%. With high inflation levels, the central bank is keeping the monetary policy tight, with benchmark repo rate set at 8%, despite the opposition from president Recep Tayyip Erdogan.
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2. Kenya
10-Year Yield: 13.1%
Kenya is facing high inflation, which reached 8.04% in August, versus 7.47% in July, as food and energy prices increased. The inflation rate is higher than the government target of 7.5%. Kenya’s government projects an economic growth of 5.5% this year, having cut it from 5.9% earlier this month. The country is also facing a political crisis, as its incumbent president Uhuru Kenyatta won the general election on August 11, but a court has annulled the victory and a re-run of the election is scheduled for October 17.
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1. Nigeria
10-Year Yield: 16.36%
At a yield of 16.36%, Nigerian 10-year bonds have the highest yield in the world. That’s why Nigeria is the first among the countries with the highest 10-year bond yields today. However, the high yield comes with a lot of risk on the economic, political, and credit. Nigeria’s inflation amounted to 16.05% in July, down from 16.10% in June and had been declining since the beginning of the year. Last year, Nigeria’s oil production was affected by militant attacks, which declined this year, which helped the production to rebound. With an increase in oil and mining production and exports, the Nigerian economy is expected to expand by 1.2% this year and by 2.4% in 2018. However, the uncertainty surrounding the militant activity remains, which might hinder the growth.
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These are the 10 countries with the highest 10-year bond yields today. While their yields might seem attractive, you can also see that the countries that issue these bonds face a lot of issues and uncertainty, which makes investing in long-term debt very risky.
