Morning Commentary: EM debt primary quiet; secondary mostly firm as year-end looms

By Rebecca Melvin

New York, Nov. 29 – The emerging markets debt primary was quiet early Thursday, while the secondary was biased to the upside as month end returns and expectations for the full year and year ahead came into focus.

There was nothing in the Central & Eastern Europe, Middle East and Africa region, a London-based market source said regarding deal announcements. “All very quiet.”

Latin America was also quiet, continuing the recent trend, with only a couple of corporate tender results for liability management garnering attention.

Market strategists have been weighing possible catalysts for future moves, namely corporate credit and economic growth prospects as well as U.S.-China trade tensions and expectations regarding further U.S. rate tightening.

“A key question we ask ourselves now is whether the benefits of investing in emerging market bonds is adequate compensation for the global risks involved, namely (i) end of the credit cycle and growth deceleration; (ii) US-China trade tensions; (iii) EM FX and rollover risks; (iv) potential deterioration of corporate credit quality and higher yields in the United States,” Gabriel Gersztein and Luca Maia of BNP Paribas wrote in a recent research note.

Gerszteini, global head of emerging markets strategy, and Maia, EM/Latam strategist, said that with the end of the cycle looming, demand for higher returns for holding riskier asses is assumed.

The strategists don’t believe that EM sovereign debt is showing an impending systemic risk, but they are calling for caution given Argentina and, to a lesser extent, Turkey, plus the health of the U.S. corporate credit sector.

The BNP Paribas strategists said this view is being expressed in “liquid, selective allocations arbitrage opportunities in Turkish lira, South African rand and Turkey five-year credit default swaps.”

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