EM debt fares well amid US Treasury selloff

Emerging-market bonds are shrugging off a selloff that's sent developed-market yields to multi-year highs. The US 30-year Treasury has climbed to its highest level since 2007, yet EM issuers have kept coming to market and buyers have kept showing up, Bloomberg reports. Where investors once demanded a steep premium for EM risk, several things are narrowing that gap.

“EMs are the new DMs,” Gavekal Research’s Udith Sikand says, pointing out failings on the latter’s part to keep a lid on inflation in recent years.

Two forces are doing the work: EM policymakers have gotten the basics right — inflation targeting, fiscal discipline, reserve buffers. And Washington's own fiscal picture is eroding the comparison: a shakier outlook for benchmark Treasuries makes EM paper look relatively less risky than it used to. A Treasury buyback program is meant to ease Washington's own ballooning debt-servicing bill, but hasn't fully calmed the market.

Persistently high energy prices on the back of the Hormuz disruption have kept inflation and yields high, particularly in developed markets, with September’s inflation reading from the Fed expected to register over a percentage point higher than targets. Other developed markets are also reluctant to make the unpopular move of reducing budget deficits that ballooned during the pandemic, Standard Bank’s Steven Barrow said.

The proof: EM local-currency bonds are up 3.5% this year against a 1.7% decline for developed-market equivalents. Pakistan’s recent junk bond sale raised a record USD 3 bn, seeing orders of nearly USD 6 bn following a ratings upgrade. The paper’s risk premium tightened by roughly 25 bps amid a tightening spread in response to rising Treasury yields. JPMorgan Chase’s gauge of EM bond premiums over the US also held steady. Plus: Uruguay central bank chief Guillermo Tolosa points to rising appetite for local-currency debt over USD paper — a shift already visible in Africa's local-currency debt boom.

Closer to home, the story is messier — and more exposed than “resilient.” Long-dated Gulf sovereign bonds have fallen to multi-month lows since the war escalated, as regional risk stacks on top of the global Treasury selloff. A Saudi 30-year bond has dropped 8.5% in price, pushing its yield to a 16-month high of 6.2%; comparable Qatari and Omani 30-year paper are down 10.3% and 6.9%, with Qatar hit hardest as Iran's near-closure of the Strait of Hormuz has gutted Gulf seaborne gas exports, AGBI reported recently. Credit spreads over Treasuries have held up better than those price moves suggest — but Mashreq Capital's Amol Shitole argues that's not reassurance: spreads should be 25-50 bps wider than they are, he says, given the risk still on the table. Saudi paper carries an extra burden of its own: heavy issuance from the government, Aramco, and PIF has created a supply-driven repricing on its long-dated bonds specifically, on top of the war and the Treasury selloff.

What’s next: The Fed's 16 September rate decision will move Treasury yields broadly. For Gulf bondholders specifically, Franklin Templeton's Mohieddine Kronfol says events in the Strait of Hormuz — and each government's own funding calendar — will matter just as much.

MARKETS THIS MORNING-

Asian markets mostly rose earlier today, with South Korea’s Kospi gaining around 2.8% and Japan’s Nikkei rising around 2%, even as attention returned to escalating regional tensions following reciprocal military strikes between the US and Iran.

THE CLOSING BELL-

The EGX30 rose 0.7% at yesterday’s close on turnover of EGP 15.1 bn (32.4% above the 90-day average). Local investors were the sole net buyers. The index is up 35.5% YTD.

In the green: Orascom Construction (+2.9%), Emaar Misr (+2.9%), and Fawry (+2.4%).

In the red: Abu Qir Fertilizers (-4.7%), Misr Cement (-1.7%), and Valmore Holding -EGP (-1.4%).