Emerging market debt holds on; Treasuries remain above 5% threshold

By Reshmi Basu and Paul A. Harris

New York, April 17 - Emerging market debt was quiet Monday even as U.S. Treasuries provided a more supportive backdrop.

During a choppy session, yields on U.S. Treasuries dipped on the back of higher crude oil prices. The yield on the 10-year note fell to 5.01% from Thursday's close of 5.04%.

Nonetheless, sources observed how emerging market debt was well supported even as the yield on the 10-year note hovered above the psychological threshold of 5%.

Monday's performance in Latin America was described as impressive, according to Enrique Alvarez, Latin America debt strategist for research firm IDEAglobal.

"We didn't budge. There have been some gains that have been pretty widespread throughout the whole category," he said, adding that Latin America saw narrower spreads.

And one reason why the region is showing resilience to higher Treasury yields is that excess cash, in the form of petrodollars, Brady bond repurchases and amortization payments, is being recycled back into the market.

Asian credits holding in

Meanwhile Asian credits were holding in pretty well, according to a trader who focuses on Asian credits. Additionally, the Philippines was among the best-performing sovereigns in the region.

The trader added that the country has been going through a sea change with regard to credit sentiment.

Spreads are at or near multi-year tights and also the market seems very well supported, noted the trader.

On the other hand, the story is different for Indonesia, the trader observed, adding that Indonesia used to trade 20 or 30 basis points inside of the Philippines, but is now flat to behind the Philippines.

One reason behind Indonesia's regression is that investors are concerned about a potential reserve problem due to Indonesia's off-market oil subsidy program.

"Everything seems to be doing okay. The market is wider is some cases but it's well supported and there is no panic," remarked the trader,

"There is no undisciplined selling."

Bonds move higher, except Colombia

At the end of the session, the JP Morgan EMBI Global Diversified index was up 0.11% while its spread was wider by three basis points versus Treasuries. Brazil's benchmark bond due 2040 moved higher by 0.20 to 127.10 bid, 127.20 offered.

Meanwhile high-beta credit Colombia underperformed the market as its currency saw another volatile session. The Colombia bond due 2027 was spotted down 3 points at 108 bid, 110 offered.

And as oil spiked above $70 per barrel, Venezuela saw higher gains. Its bond due 2027 added 0.70 to 123.15 bid, 124.50 offered.

Overall, spreads have been trading in narrow ranges as the market appears void of momentum, noted one source.

Alvarez points out that it is hard to imagine how much tighter spreads can go, considering that the overall external environment is not necessarily favorable.

The commodity story and the "recycling of petrodollars argument" lend market support, but the asset class does indeed face high U.S. rates and potentially renewed concerns on inflation. And those factors will impact emerging markets and perhaps lead to a disruption in equities, which for some time was a price driver for emerging market debt, he added.

Furthermore, the asset class saw large flows come in from London on the back of the crude oil rally seen at the start of this year. And that recycling of oil revenues is likely to occur again given the current price level of crude.

Asia's subdued pipeline

Back to Asia, the trader quoted above said that the move in interest rates had indeed had a slight impact on the Asian pipeline. The pipeline is very quiet and looks to stay that way for the time.

"It has basically weeded out some of the higher yield credits which are much more rate sensitive than the investment-grade credits. The thing that has hurt the most is the really strong U.S. high-grade calendar," noted the trader.

In effect, that has squeezed out a lot of the Asian high-grade new issuance that was in the pipeline because of the difference in valuations.

Since U.S. high-grade deals are coming, investors are seeking to find a rich asset in the portfolio to raise money for the new issue, and more often than not they were choosing to sell Asian high-grade names.

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