Emerging market debt wider on volatile equities; Asian credits softer as risk aversion rises

By Reshmi Basu and Paul Deckelman

New York, March 5 - Emerging market debt saw a roller-coaster ride Monday, as it moved in sync with a volatile U.S. equities market.

The increased risk aversion was not only sharply felt during New York trading hours but in Asia as well. During the Asian session Monday, credits tracked regional equity markets lower as investors unloaded risk across the spectrum, according to a market source.

On the sovereign side, the five-year Philippines credit default swap widened 12 basis points from the close of the New York session Friday. Indonesia saw its spreads kick out by 10 basis points.

On the corporate front, credits did not fair any better. Spreads for high-grade credits widened by 4 basis points as benchmark names such as Hutchison Whampoa and ICICI Bank were softer on the day.

By the time New York trading rolled around, the overall weak tone seen in overnight global markets spilled into the U.S. stock market, which in turn weighed on EM sentiment.

However, by mid-afternoon, the U.S. market attempted to stage a recovery, which helped ease some of the pressure in emerging markets. But that comeback was short-lived and the sector ended the day lower.

Asian credits choppy in N.Y. hours

A trader in Asian issues said that it was "a pretty choppy session - we opened very defensively, then actually recovered quite a lot of ground over the course of the day. But as [U.S.] equities came off in the last hour or so, we widened back out again, and closed pretty poorly." He opined that that was probably the case with the emerging debt markets overall.

It was "not a good close at all," he added, "at least for all of my credits." However, he noted that "we haven't seen a great deal of customer selling here, and volumes have been relatively light today [Monday]."

While EM debt has been pushed downward and spreads have widened pretty much across the board since the global equity market debacle began in China a week ago, sovereign paper was being hit harder than corporates largely due to technical factors.

"There isn't the same amount of liquidity in the market this year because of the relatively light new-issue pipeline [so far this year], so there doesn't feel to be the same sort of float of paper in the market as there has been in previous years, so what that means is the more liquid benchmarks are taking the brunt of the hedging and taking the brunt of the selling. So Philippine CDS in particular have been much more active than they had been of late," the trader said.

He also saw pockets of activity in Philippine sovereign cash bonds "and to a lesser extent, Japanese bank capital, Hutchison Whampoa, etc. - but most of the activity has been in the sovereign CDS issues."

The CDS contracts linked to Philippines government debt had been as tight as 138 basis points earlier in the session, but he said there were going out around 144 bps, "6 bps off the tights of the day and back toward the overnight wides." Indonesia CDS were trading about 2 basis points tighter than the Philippines, but were moving in the same fashion.

Earlier in Asia, prices of Philippines cash bonds were seen weaker, with its 2032 bonds quoted down ½ point at 96.375, while its 2031 bonds here hovering around 111.5 bid. On a spread basis, Philippines dollar issues widened out to spreads of 196 bps from 187 bps on Friday.

Corporate issues, like ICICI Bank's 2012 bonds, widened by some 10 bps to 120 bps over.

Later in the session, Ecuador's volatile bonds were seen as the biggest loser in the Latin American sphere, with their spread over comparable Treasuries widening 25 bps on the day to 741 bps.

Overall, the widely followed JP Morgan EMBI+ Index widened to an average spread of 196 bps over Treasuries - higher by 5 bps on the day, and well up from its record tight spread of 164 bps, less than two weeks ago, on Feb. 22.

Risk aversion up in yen, U.S.

In recent sessions, the weakness within the market has been coming from a convergence of factors on the external side. From the U.S. side, the disintegration of the U.S. sub-prime mortgage market has been fed by - and may further feed - a slowdown in the housing market, which in turn has raised worries as to U.S. growth prospects.

Additionally, investors have been worried by the unwinding of the carry trade through the appreciation of the Japanese yen, according to Enrique Alvarez, Latin America debt strategist for think tank IDEAglobal.

However, the external debt market has outperformed its equity counterpart, receiving support from positive inflows into the asset class as well as a thin new issue pipeline, noted a source.

Since the start of the sell-off last Tuesday, the market has seen spreads widen by 16 bps on the JP Morgan EMBI Global index while posting a negative return of 0.04%.

However, the sell-off has not produced any point of entries as many feel that the current decline has not yet bottomed out.

"Last week, it looked like the market was going to start reacting more to specific U.S. economic factors," but that has not in fact held true, said Alvarez.

Instead he pointed out that the market has become nervous about the unfolding of events on the Asian currency market front, specifically the unwinding of the yen.

For stability to return, the market needs to see recovery from two sides: the pressure to subside on the Japanese yen and the U.S. economic side, particularly the sub-prime market, Alvarez added. Neither of those are simple tasks.

"We are basically in the early throes of a correction. We have some externalities and domestic U.S. factors that need to work their way through," he noted.

"I tend to think we need to widen a little more and prices need to correct somewhat more."

© 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.