Emerging-Market Bond Slide Coming If Treasuries Hit 3.5%: Saxo

(Bloomberg) -- Get ready for a surge in premiums on emerging-market dollar bonds to their highest since mid-2016 if the current sell-off in U.S. Treasuries sends benchmark 10-year note yields up to 3.5 percent, says Simon Fasdal at Saxo Bank A/S.

"That’s the big risk I’m seeing at the moment," Fasdal, the bank’s Copenhagen-based head of fixed income trading, said in an interview on Wednesday in Hong Kong. "If we do see a quick and big spike like that, we’d see a correction of up to 100 basis points spread widening in the emerging markets corporate bonds.”

Fasdal had these further thoughts on the implications of rising U.S. Treasury yields:

  • Most emerging-market corporate bond spreads will widen more than 50 basis points.
  • Europe’s corporate bonds are also vulnerable, as rate levels depressed by the European Central Bank will leave too wide a gap with the rest of the world; ECB President Mario Draghi "can’t simply stay away" from tightening if global growth stays solid and the Federal Reserve is hiking.
  • The risk-reward dynamics aren’t attractive for European corporate debt compared with emerging market and U.S. peers, as rates on shorter-dated dollar securities climb
  • Expects to see pockets of opportunities in emerging markets soon, although at the moment he is cautious and prefers short duration.
    • "If the selloff continues and we see a meaningful correction, I will look to LatAm and Asia for opportunities," he said, referring to Latin America.
    • Likes Brazil’s tech, food and commodity-related sectors, and suggests entering Indonesia once the nation’s currency stabilizes.

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