January 12, 2018 / 1:22 PM / a year ago

EM sweeps aside Treasury sell-off

* Supply flies even as Treasury yields leap higher

By Sudip Roy

LONDON, Jan 12 (IFR) - A sell-off in Treasuries this week saw 10-year yields leap to their highest since March but the move was swept aside by nearly three dozen emerging markets borrowers, who raised more than US$30bn between them.

The 10-year yield jumped 13bp in the first of half of the week, peaking at just under 2.60% on Wednesday following news that the Bank of Japan will cut purchases of long-end JGBs and that China may slow its buying of Treasuries - a story that China later denied.

That denial led to a bit of recovery with yields back down to 2.54% by Friday, although the convulsions in the rates market has led some commentators - most notably Bill Gross - to proclaim the beginning of the end of the bond market’s bull run.

But while the total return from Treasuries is on course for the worst January since 2009, according to Bank of America Merrill Lynch, credit markets continue on their merry way.

Emerging markets supply kicked into full swing this week as 34 issuers across the globe raised funds in either US dollars or euros. Deals also took place in niche markets such as Swiss francs, Australian dollars and offshore renminbi.

Bankers said the supply spree was down to the wall of cash that investors need to deploy. “The liquidity available is ridiculous right now,” said one banker in London.

Emerging markets bond funds received US$3.6bn of inflows over the past week, the second largest on record, according to BAML and EPFR Global.

That meant deals saw plenty of demand despite the volatile backdrop. Turkey was able to get a book in excess of US$5bn, Oman US$15bn, Israel over US$18bn, and even Macedonia more than €3.5bn.

A second banker said the market is more resilient to shocks than before with big investors that never used to be on the emerging markets radar now involved in the asset class. “There’s proper institutional money underpinning it.”

He said that while the recent rates moves have had an impact on ETFs, real money accounts have been less affected because they are “just sitting on the sidelines waiting for deals; they are not so active in the secondary.”

Unless rates shoot up significantly higher, potentially making borrowing costs prohibitively expensive, nothing is likely to derail primary supply in the coming months.

And while central bank policy remains largely accommodative, albeit not as loose as before, bankers say it’s difficult to see what could push Treasury yields higher on a sustainable basis.

Perhaps it will be the equity markets that lead to a change in sentiment. “One frequently asked question is ‘what level of bond yields will cause equity markets to fall?’ said BAML analysts. “Better question is “what level in [S&P 500] causes Fed to start hiking 50bp”... it’s not 2767.” (Editing by Julian Baker)

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