Emerging market debt sees red on U.S. interest rate jitters

By Reshmi Basu

New York, June 13 - Emerging market debt declined again Tuesday, led by a fall in high beta names on the back of global equity weakness.

"The market has been under pressure for most of the day," according to Enrique Alvarez, Latin America debt strategist for research firm IDEAglobal.

Latin American stock markets were once more slammed as interest rate worries in the United States undermined investors' appetite for risk. The Colombian IGBC fell 8.7% after declining more than 10% on Monday. Both the Brazilian Bovespa and the Mexican Bolsa posted losses of more that 2%.

As a result of Colombia's equity meltdown, the country's sovereign bonds led the downturn across the region.

The nasty scenario in Colombia filtered through to fixed-income instruments, which were down 2% Tuesday, Alvarez said.

The Colombian bond due 2033 plunged 1.50 to 127.50 bid, 128.50 offered. The country's bonds due 2016, 2023, and 2027 were each spotted down around two points in late afternoon trade.

Another underperformer was Peru. Its bond due 2033 was down 0.50 to 111bid, 112 offered.

The bellwether Brazilian bond due 2040 lost 0.55 to 123.10 bid. 123.25 offered.

Elsewhere, the Russian bond due 2030 gave up 0.25 to 106.875 bid, 107 offered while the Turkish bond due 2030 lost 1.13 to 140.875 bid, 141.375 offered.

At session's end, the JP Morgan EMBI Global Diversified index was down by 0.3% while spreads widened by eight basis points versus U.S. Treasuries.

EM debt lags local market sell-off

However, sources have noted that the recent correction has been more prominent in local equity markets than the external debt market. And Tuesday was no exception.

"It's worrisome because we seem to have a lag there," he cautioned.

Alvarez commented that the fundamental story may somewhat explain why the debt market has had a slight edge over equity markets. Dedicated players may be guarding positions because fundamentals in emerging economies are still solid. Also, the market may be expecting to see a reversal in U.S. Treasury rates, which explains why investors are holding on.

Nonetheless, Alvarez noted that the external debt's out-performance may not be maintained if the local market volatility continues.

Colombia removes foreign flow controls

Meanwhile, the Colombian government removed administrative controls that required a minimum lock up period of one year for new foreign portfolio inflows.

"What they are trying to promote is perhaps some bottom fishing, some vulture funds coming in and perhaps supporting the market a little bit," remarked Alvarez.

The measures could have medium- to long-term impact on flows, according to an analyst note. The move is meant to encourage foreign investors to invest, and therefore curb the local sell-off. But since risk aversion has magnified in the short-term, it may be unlikely that foreign investors will enter the market anytime soon.

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