Emerging market debt tracks equities lower as nervousness remains

By Reshmi Basu

New York, June 12 - Emerging market debt remained skittish Monday, taking its cue from dismal performances by global equity markets.

Emerging market debt saw lower dollar prices, unable to protect gains from the previous session, which saw spreads tighten on short covering.

On Monday, an ugly session for U.S. equities as well as local markets drove down foreign exchange markets, local rates and the external debt markets, according to a market source.

Persistent concerns about higher interest rates and an economic slowdown in the United States have sparked the ongoing unwinding of trades among core financial markets. By session's end, the Dow Jones Industrial Average index had plunged 99.34 points to close at 10.792.58.

Furthermore Latin American stock markets were also slammed, tracking U.S. equities lower. The Mexican Bolsa fell 4.3% while the Argentinean Merval saw its biggest fall since November 2004. Trading at the Colombian stock exchange was halted after the IGBC fell 10% intra-day.

The equity unraveling is the result of crowded trades in instruments that appear to be not as liquid as the market had once thought, noted a source

Nonetheless, even though global equity markets saw an ugly session, the external debt market "somewhat weathered the storm," observed a trader.

Spreads kick out by 2 bps

At session's end, spreads for the JP Morgan EMBI Global index were wider by only two basis points.

On the day, the benchmark Brazilian bond due 2040 gave up one point to 123.75 bid, 123.80 offered. The Argentinean discount bond due 2033 lost 0.90 to 94 bid, 94.35 offered. The Colombian bond due 2033 shed one point to 129.50 bid, 130 offered. And the Venezuelan bond due 2027 lost 0.35 to 120.65 bid, 121.40 offered.

Over the last month, spreads have widened out by some 35 basis points. Valuations in the market are looking more attractive, but investors are unwilling to add risk due to the extent of position overhang, according to an analyst.

Local markets have seen the blunt of the current correction, but the international bond markets have been far from immune. Moreover, participants are looking to see how much more local markets, particularly equities, will unravel, noted the analyst.

Adding to investors' worries, local core markets are jittery on fears of a potential tighter global rate environment. Foreign exchange weakness triggered some central banks to pre-emptively raise rates in recent days.

Last week saw the European Central Bank, South Africa, South Korea and India all raise key lending rates. And the question is how those rates will influence core markets' performance, noted the analyst.

Meanwhile the market is expected to see more volatility this week on the back of Fed speeches and a busy week for U.S. economic data.

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