Several signs point to increased risks around government-issued debt, as recent research reveals credit agencies issued three times more downgrades than upgrades to ratings.
There were 61 downgrades to sovereign risk by credit agencies compared to 19 upgrades in the second quarter, according to a study from IHS Markit published this week.
"The second quarter of 2016 saw commodity-related downgrades reach record levels," Jan Randolph, director of sovereign risk at IHS Global Insight, said in a press release on Tuesday. "Commodity-related rating downgrades increased, especially in Africa and the Middle East."Jitalia17 | E+ | Getty Images
The U.K. was also highlighted as a potential risk. U.K. sovereign bonds have been one of the best performing assets in 2016, although ratings agencies downgraded the country's credit rating in June following the referendum on EU membership.
"The United Kingdom faces specific credit risk in its regular dependence on foreign investment inflows to finance its record current-account deficit," Randolph warned.show chapters
Sovereign debt does not look cheap: Pro
Part of the problem is the constant downward pressure on government bond yields. This is a concern as it pushes investors into riskier assets, such as equities, which in turn pushes up valuations and reduces the expected return on those assets, according to a report by investment managers BlackRock.
"More than 70 percent of the bonds in developed-market government bond indexes today have yields of 1 percent or lower, with roughly a third below zero," the company said in its Global Investment Outlook report released in July.
"Slow global growth, negative interest rate policies, quantitative easing, and a flight to quality amid elevated global risks have pushed yields even lower."
Furthermore, this era of low bond yields is likely to continue, warns Julian Chillingworth, chief investment officer at Rathbones.
"Sovereign debt does not look cheap," he told CNBC's Squawk Box. "The central banks are desperate to keep economies on an even keel, so consequently I suspect we're in for a prolonged period of lower bond yields."
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