Market decline keeps EM assets weak; bonds sell off; wider spreads for India, Korea, Lat-Am

By Christine Van Dusen

Atlanta, Aug. 24 – Risky assets, particularly those from Asia, remained weak on Monday as stocks and commodities continued to plummet on concerns about China’s economy.

“Flows today were skewed aggressively towards better sellers of all emerging markets paper,” a New York-based trader said.

Asian credits led the sell-off, with investment-grade cash bonds closing their session 5 basis points to 15 bps wider, a London-based trader said.

“We started the day 5 bps wider, and the sell-off [worsened] as the Shanghai composite went from [being down] 3% to end the day down 8½%,” he said.

Technology names from China were 10 bps to 20 bps wider while Korea’s bonds moved out between 5 bps and 8 bps, he said.

“But we’re not seeing any panic selling with the provocations out of North Korea,” he said.

Spreads from India were between 5 bps and 10 bps wider amid “very thin” liquidity, he said.

“Malaysia was mixed, with the Malaysia curve 5 bps wider,” he said.

Petroliam Nasional Bhd. (Petronas) saw its curve widen by 10 bps, he said.

From Latin America, bonds moved wider and lower “as the pain from last week carries over into this morning,” a New York-based trader said. “Liquidity is the primary concern, as cash prices are difficult to navigate, with few prints at all in the early going.”

Most of the inquiries were for bids, another New York trader said, but volumes remained relatively small.

“Hopefully it does not turn into a liquidation sell-off,” he said. “But I have seldom seen a sell-off of this kind, with such relatively small selling volumes and so little screen trading.”

Brazil sees some activity

As the session went on, prices for Latin American bonds stabilized and some trading took place, another trader said.

Brazil saw most of the activity, he said, but big accounts were still on the sidelines.

At the close, low-beta spreads from Latin America were wider but had improved from their widest levels of the day, another trader said.

Five-year credit default swaps spreads for Brazil closed at 360 bps from 346 bps, while Mexico’s moved to 158 bps from 155 bps, he said.

“Very little liquidity in cash prices throughout the session as the few bids that were put up onscreen were hit immediately, regardless of spread or level,” he said.

High-yield bonds from the region outperformed high-grade, he said.

Venezuela’s 2027s closed at 35 1/8 from 35¾ and PDVSA’s finished Monday at 64.25 from 65.

Turkish curve widens

Looking to Turkey, the curve was between 15 bps and 18 bps wider, in line with the moves of the larger market, another trader said. But the sovereign hasn’s been hit as hard as those in Asia.

“There has been more underperformance, for example, in the Indonesia curve, with its closer proximity to China,” he said.

Bank and corporate paper from Turkey underperformed, he said.

“They were too tight to the sovereign, and the Street is now trying to push paper to the wides versus the sovereign,” he said. “Subordinate bank paper is underperforming once again, trading at new wides versus seniors.”

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