EM debt weaker in light pre-holiday trading; Argentina spreads deteriorate further

By Rebecca Melvin

New York, Dec. 21 – Emerging markets debt weakened on Friday after holding in early in the session as liquidity dried up ahead of the Christmas holiday next week.

Early in the session the JPMorgan emerging market bond global index stood at a spread of 423 basis points, which was in by 2 bps.

Total return for the JPM EMBI global for the year was negative 4.51%, as of the market close on Thursday.

Liquidity is gone out of the market, a New York-based market source said on Friday, describing the trading desk of his firm as only half staffed.

The new issue market for EM bonds is effectively closed except for some Chinese issuance, the source said. And “there is very little in the way of large, strategic positions for the rest of the year.”

The past week has seen volatile trading in which credit default swaps widened dramatically. “It’s a difficult period,” a New York-based source said.

Argentina debt on Friday was at its widest spread level of the last month. Argentina has careened lower, with wider spreads and higher yields, since September. The credit had tumbled in August and recovered about 10% until Sept. 21. But since then, despite its International Monetary Fund financing, Argentina’s dollar-denominated, cash bonds have dropped. They are down 8.1% over the last three months. In contrast Turkey, which also plummeted in August, has a cash bond return of 6.2% for the last three months.

For the six months from June, Argentina cash bonds have returned negative 9.8%, but Turkey is up 6.9% for the same period.

Both Turkey and Argentina were falling all year long and both effectively came to a bottom on Aug. 13, when Argentina had a negative return of 22.6% year to date, and Turkey has a negative return of 20.6%. But it’s the tale of two recoveries with Argentina, the one that got the IMF package, which usually encourages capital inflow, suffering what amounts to a no confidence vote from investors, a New York-based market source said.

Both economies slowed and raised interest rates, but the correction in Turkey is much greater than in Argentina.

“The Argentine bond market has fallen back down to almost its lows. In the minds of EM portfolio managers, there is a cloud hanging over the Argentine assets,” the New York-based market source said.

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