Credit investors in the U.S. are requesting dealers structure synthetic collateralized debt obligations linked to both emerging market debt and emerging market currencies. Barclays Capital and JPMorgan are working on deals which would employ out-of-the-money puts on individual currencies. A deal would likely reference a basket of 15 individual currencies, said an official at Barclays. Calls to JPMorgan were not returned by press time.
The structures would follow the format used by so-called commodity default obligations, which use deep out-of-the-money put options to mimic a default in the value of the underlying (DW, 9/15).
Emerging market credits have seen increasing activity in the past few months, according to traders, signaling that real money accounts in the U.S. are starting to invest in the sector. European and Asian investors have also got into emerging market CDOs this year (DW, 2/10). In the past two weeks, protection selling from investors taking emerging market credit exposure has driven the emerging market sovereign credits credit derivatives index tighter, with spreads moving from its high of 129 basis points on Nov. 1 to a low of 100 bps last Monday.
