With U.S. Stocks in Tailspin, Here Are EM Bonds to Watch Out For

(Bloomberg) -- Chinese and Thai bonds are set to be the most resilient emerging-market securities to the coronavirus market meltdown, according to a Bloomberg analysis of past sell-offs in U.S. shares.

The spread of Chinese bonds over Treasuries widened by an average of just 0.4 basis point for every one basis-point move in the U.S. yield during past U.S. stock collapses, while Thailand’s expanded 0.5 basis point, according to a study of 11 EM debt markets. The corresponding numbers were 2.5 basis points for Russia and 1.4 for South Africa.

The securities showing the smallest reaction to stock losses are those from economies that are more closed to foreign portfolio flows, or seen as semi-havens. In contrast, the biggest moves were seen in countries with high levels of foreign ownership, relatively freely-traded currencies, and a dependence on oil revenues.

READ: Goldman Sachs Says Oil Is Achilles Heel of EM Sovereign Credit

Emerging-market investors are facing surging volatility and a growing pile of negative-yielding debt as the spread of the coronavirus pushes central banks around the world to lower benchmark rates. U.S. stocks saw their biggest losses since the 2008 financial crisis on Monday, and the epidemic in the U.S. shows no signs of plateauing.

The Bloomberg study covers seven periods from mid-2011 until the most recent coronavirus-related equity rout in March. Below is a table showing the size and consistency of how each nation’s rates responded on average. Click here for more details on the methodology used.

Key Insights

• China’s spread rose by an average of only eight basis points versus an average of 19 basis-point move in the U.S. rate, or a ratio of 0.4 basis point, as foreign investment in its local-currency bonds remain low, with its securities mostly reactive to domestic fiscal and monetary policies
• Thailand’s spread increased by an average of only 0.5 basis point per 1 basis point move in Treasuries, underscoring the baht’s semi-haven position due to its robust current account surplus and central bank foreign reserves
• Russia’s spread widened by an average 2.5 basis points per 1 basis point move in Treasuries, on the back of its high dependence on oil and elevated foreign shareholding
• South Africa’s spread increased by an average 1.4 basis points per 1 basis point move in Treasuries, likely reflecting its high foreign shareholding in its local-currency bonds, ongoing twin deficits since 2012 and the rand’s freely-traded position
• Turkey’s spread increased by an average of 1.4 basis points per 1 basis point move in Treasuries, reflecting the bond’s sensitivity to EM outflows due to deficits in its current account and fiscal position, as well as elevated inflation
• NOTE: Marcus Wong is an EM macro strategist, who writes for Bloomberg. The observations he makes are his own and not intended as investment advice

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