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EM debt trading on the rise

Emerging market debt trading volumes have surpassed the previous year’s figures on an improving risk sentiment amongst investors. Brazil in particular saw its Eurobonds being widely traded as yield hungry investors took advantage of the country’s recent economic situation.

Jun 17, 2016 // 5:29PM

Debt trading across EMs amounted to US$1.299tn for Q1 2016 according to an EMTA survey.

The survey added that levels were up 6% over Q1 2015 at US$1.226tn and up 13% over Q4 2015 at US$1.152tn.

The rise in trading levels resulted from a recovery in the risk sentiment that was prevalent over the end of the last and beginning of this quarter, according to Stuart Culverhouse, Chief Economist at Exotix.

“As expectations of the likelihood of a US interest rate hike softened, fears over China eased and commodity prices strengthened, trading recovered in the second part of the quarter.”

Culverhouse added that yields had also risen to elevated levels by January, meaning investors saw more value following the sell-off.

Although further US interest rate hikes, a return to concerns over the weaknesses within the Chinese economy and another downturn in commodity prices could all slow EM debt trading in the future, other factors could have an impact.

“Brexit, if it happens, would also slow debt trading for a period of time because of a likely increase in generalised risk aversion. Debt valuations have also become richer after the rally in markets since Q1 and so trading may soften just as a result of that.”

The most frequently traded assets according to the survey were those of Mexico, which represented 18% of overall volumes and constituted US$234bn.

The survey stated that this was followed by India at 14%, or US$176bn, Brazilian at 10% or US$188bn, and China and South Africa at US$97bn and US$77bn respectively.

These countries’ instruments were the most traded as they are among the more liquid local currency markets according to Culverhouse, so will generally be the most attractive to investors returning to local markets in the first instance.

“For Brazil, markets also responded positively to moves to impeach President Rousseff, which has helped its currency to strengthen.”

Brazilian Eurobonds were especially widely traded according to the survey, with the country’s 2025, 2045 and 2021 bonds providing turnovers of US$5.6bn, US$4bn and US$3.1bn respectively.

The reason behind this, Culverhouse noted, is that for the past two years EM investors and other global macro investors or distressed specialists have followed the high yielding special situations in Argentina, Ukraine, and Greece.

“As these situations have come to an end, investors have looked elsewhere and many have focussed on Brazil as the next crisis country. The country’s political crisis, with the resulting currency depreciation, recession and high inflation has caused a number of corporate defaults and sovereign spreads also widened.”

Culverhouse stated that this created many different opportunities for investors who saw value in certain distressed or special situations, adding that investors are now more optimistic that the political crisis may be nearer an end with the arrival of interim President Temer. 

Global Macro

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