On Monday, Pakistan’s dollar-denominated sovereign bonds experienced a staggering decline of over 13 cents on the dollar, marking the most severe single-day drop since the onset of Russia’s full-scale invasion of Ukraine in early 2022.
The selloff followed escalating trade rhetoric from former US President Donald Trump, whose renewed threats of broad-based tariffs have shaken global markets.
The unexpected surge in geopolitical risk prompted a sharp pivot toward safe-haven assets, leaving riskier emerging market debt, particularly in frontier economies like Pakistan and Sri Lanka, exposed to severe losses.
Trade Tensions Ignite Investor Flight from Emerging Markets
According to market data, longer-dated Pakistani and Sri Lankan bonds lost more than 6 cents in intraday trading, with yields soaring as investor appetite for risk collapsed.
Pakistan’s sovereign credit risk premium widened dramatically, as reflected in surging credit default swap (CDS) spreads, signaling growing doubts about the country’s ability to meet its external obligations.
A wide swath of hard-currency bonds issued by smaller and more fragile economies saw steep price declines, driven by fears over debt sustainability.
Among the worst-hit were Angola, Gabon, and Zambia, which each recorded bond price drops of around 4 cents. These nations, heavily dependent on oil and copper exports, were particularly vulnerable to simultaneous commodity price slumps and investor exodus.
The confluence of geopolitical trade shocks and weakening global demand for raw materials has created a perfect storm for frontier markets, severely testing their resilience in a tightening global financial environment.
This flight to safety left lower-rated sovereign issuers scrambling as spreads widened, access to international markets shrank, and financing costs ballooned.
In Sub-Saharan Africa, almost every international bond—except for a handful from better-rated countries like Namibia and Seychelles—saw yields exceed 10%, a threshold often regarded as unviable for sustainable borrowing.
Pakistan’s Economic Outlook Further Complicated by External Shocks
Already grappling with mounting economic pressures, Pakistan faces an increasingly constrained fiscal and external environment. The country has struggled with foreign exchange shortages, high inflation, and persistent current account deficits in recent quarters.
The reported $3.3 billion trade surplus with the United States, once a rare positive, now offers little insulation against the global headwinds hammering risk assets.
Pakistan is not alone. Sri Lanka, which recently emerged from a historic sovereign default, also saw its bond prices tumble, reflecting lingering doubts about the pace and credibility of its economic recovery.
The broader context paints a grim picture for emerging markets dependent on external debt and commodity exports. As the US Federal Reserve holds interest rates at elevated levels to combat domestic inflation, capital continues to drain from riskier jurisdictions, exacerbating financial stress.
