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Sovereign debt is getting riskier, experts warn 

August 18, 2016

Luke Graham, CNBC

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."

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.

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. Read more

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