Over the last week, emerging market bonds have been pronounced a safe haven asset by traders looking at their relative stability against a backdrop of the US being downgraded and markets trashing the Eurozone. But the underlying investor sentiment, demonstrated by a freezing of the new issue market, is far worse than secondary market levels suggest.
The JP Morgan EMBI global is only 50bp wider than the end of last week — a mere blip compared to the Armageddon numbers elsewhere in the world. Until today, cash prices had barely budged, rallying even until late last week. But traders say that the market for EM bonds is largely illiquid at the moment, with the only exception being the Middle East.
At least part of the reason is that there has been no forced selling. But no-one wants to buy either, despite the funds having stored up huge cash positions. Emerging markets bond funds last week took in over $1bn for the second time this year, while EPFR global-tracked US equity and bond funds posted their biggest outflows since the second quarter of 2010 and the fourth quarter of 2010 respectively.
But syndicate officials say that it would be nearly impossible to find an investor to buy a new deal at the moment, even if they were to be offered a huge 50bp or so new issue premium to do so.
The bond fund flow data due to come out later this week will tell a more complete story as to the resilience of emerging market bonds. Emerging market bond funds have taken in fresh money for 19 weeks in a row now, taking year-to-date inflows to over $19bn.
The last outflow was prompted by the start of the Arab spring, events entirely unrelated to the Eurozone or US debt. So far, stress in the Eurozone has only served to drive more money into emerging market funds.
Whether this latest, and so far deepest, period of instability has affected investors’ allocations to emerging markets will give the best indication so far as to how EM could hold up in the face of even deeper problems that may come.