Emerging market debt sees red on volatile session

By Reshmi Basu and Paul A. Harris

New York, May 22 - Emerging market debt followed global equities lower Monday as prospects of higher interest rates in the United States made for a shaky session.

Investors gobbled up safe-haven U.S. government bonds as they made the switch out of equities and commodity markets.

Market sources said that emerging market equities and local markets were particularly vulnerable Monday, but emerging market debt also felt pressure as the flight to quality gained momentum amid the current de-leveraging cycle.

During the session, the spread on the JP Morgan EMBI+ index kicked out seven basis points to 217 basis points versus U.S. Treasuries. At one point in the session, spreads had widened by as much as 15 basis points.

A trader described the session as "pretty volatile."

"Market is overall weaker on the day," he said, adding that the asset class retraced some losses toward the end of the session.

"We were significantly wider this morning. It [EM] followed equity markets and what the perceptions of what the risk markets are," the trader added.

Another source commented that the sharp decline in commodity prices triggered Monday's sell-off with high beta credits taking the blunt of the bearish sentiment.

During the session, the Brazilian bond due 2040 shed 0.90 to 123.10 bid, 123.20 offered. The Argentinean discount bond due 2033 lost 1.40 to 92 bid, 92.50 offered. The Mexican bond due 2026 gave up one point to 149 bid, 151 offered. And the Turkish bond due 2030 was down two points to 141.875 bid, 142.625 offered.

Players included dealers and fast money. And there were decent trading volumes for a Monday session, observed the trader.

A buyside source said that he was not nervous about the market, but he is not enthusiastic either.

"But it's getting a little more interesting," he said.

EM tracks U.S. data

Like most investors, he is focusing on U.S. economic data for clues as to where U.S. monetary policy is heading. While market participants are sifting through the numbers looking for trends, the market has been in a "day-by-day" mode. One report can trigger a sell-off, as witnessed by last Wednesday's U.S. consumer price index where the EMBI+ index widened by seven basis points to 201 basis points versus Treasuries.

"We're getting to the point where we probably are truly neutral. And that's going to make the market exceptionally jumpy to anything perceiving that the Fed is too far behind or too far ahead," observed the buyside source.

Furthermore, he expects to see more pressure. So far, the asset class has widened by 40 basis points since the start of the sell-off in mid-May. But he is not ready to buy on dips, summing it up as a premature move.

"I wouldn't call this a 'buy,'" he said, adding that this was the first correction the market has seen this year.

Meanwhile he noted that the market was long.

"But I got to take that these moves in the currencies are really shaking some people.

"Turkey is trading at three-year weakness."

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.