Toxic trio turns tantalising
Dubbed the Toxic Trio earlier this year, the high-yield bond markets of Argentina, Ukraine and Venezuela are starting to look a lot more appealing.
Argentina and Venezuela were the biggest beneficiaries of the recent rally in emerging market debt, according to data from JP Morgan, which says it has added an overweight Argentina position to its existing overweight in Venezuela, and has Ukraine at market-weight:
High spread and NEXGEM (frontier) countries have led the spread tightening since early February, making positions in these segments difficult to ignore
Argentina and Venezuelan spreads over U.S. Treasuries have tightened by more than 300 basis points over U.S. Treasuries, topping the league for performance in the JP Morgan Emerging Market Bond Index Global (EMBIG) and NEXGEM indices.
Argentina is paying coupons to investors while it tries to resolve a U.S. court case, but that won’t be resolved until next year, JPMorgan says. Meanwhile, the country has started focusing more on building up foreign exchange reserves, which is also positive, the bank adds.
Venezuela’s new FX regime will allow a big devaluation in the currency which will start to address imbalances, JPMorgan says.
Ukraine is less clear-cut, but agreement over an IMF deal is helping.
Investors have started to find emerging debt cheap, causing spreads to snap in by more than 90 basis points in the past two months. According to JPMorgan:
Argentina, Ukraine, and Venezuela are…likely to continue to attract interest due to relative value opportunities
Could the Toxic Trio become the Tantalising Trio?