Thai and Chinese bonds offer hope

SINGAPORE: 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 US shares.

The spread of Chinese bonds over US treasuries widened by an average of just 0.4 basis points for every one-point move in the US yield during past US stock collapses, while that of Thai bonds expanded by 0.5 basis points, according to a study of 11 emerging debt markets. The corresponding numbers were 2.5 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. The biggest moves were seen in countries with high levels of foreign ownership, relatively freely traded currencies, and a dependence on oil revenues.

Emerging-market investors are facing surging volatility and a growing pile of negative-yielding debt as the spread of the coronavirus pushes central banks to lower benchmark rates. US stocks last week saw their biggest losses since Black Friday in 1987.

The Bloomberg study covers seven periods from mid-2011 until the most recent coronavirus-related equity rout in March.

It shows that China’s spread rose by an average of only 8bps versus an average move of 19bps in the US rate, as foreign investment in its local-currency bonds remains low, with its securities mostly reacting to domestic fiscal and monetary policies.

Thailand’s spread increased by an average of only 0.5bps for every 1-point move in treasuries, underscoring the baht’s semi-haven position due to the country’s robust current account surplus and central bank foreign reserves.

Russia’s spread widened by an average 2.5bps per 1-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 1.4bps per 1-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 1.4bps per 1-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.