EM rates traders see ‘wobbles’ as a result of Fed moves in March

Published on 29 April 2021

Spreads in emerging markets have proven resilient to Federal Reserve rate moves in March, with ‘wobbles’ but no major impact, however traders have had to tweak trading execution in order to manage those, says Chris Perryman, corporate portfolio manager and head of trading at PineBridge Investments.

Relative to the volatility of March 2020, traders have been focused on fundamentals and spotting any curve anomalies to identify relative value opportunities. Buy-side traders see their role as price taker changing, due to sell-side focus on risk transfer than risk taking, which reduces the length of time momentum affects the market, via volatility and outflows, due to a more stable base of asset holders. As a result investors can take longer term views of EM based on fundamentals he notes.

Dan Barnes: Welcome to Trader TV – I’m Dan Barnes. In March we saw a lot of focus on the US Treasuries market as the Fed started to make changes to interest rates. However, that also has an impact on emerging markets. Joining me today is Chris Perryman, corporate portfolio manager and head of trading at Pinebridge Investments. Chris, welcome to the show.

Chris Perryman: Thanks, Dan.

Dan Barnes: Can you tell us how have EM been responding over the past month to changes from the Fed?

Chris Perryman: For the hard currency EM rates market we can gauge this by a few measures. I think the first measure really is to look at spreads, and actually, if you look at that measure, EM has been extremely resilient. Spreads over that month have actually tightened in the IG sector, which would be the most sensitive to rates. And in high yield we actually saw a little bit of widening, and that’s really from idiosyncratic storage rather than necessarily rate risk. On the technical side, ETF flows, which for us is really a short term measure that tends to wash out, but is relevant for a month measure of period. What we’ve actually seen is inflows into EM rates, so the technical picture is actually supportive for EM as well. So the only challenge really for EM rates, which people probably have felt is the negative spin that gets put on is total return. So the US rate element of that product in terms of total return. So yeah, EM has been very resilient.

Dan Barnes: And then how have these movements changed liquidity and price formation for people actually on the trading desk?

Chris Perryman: What we’ve seen is wobbles is how I describe it. I mean, this is by no means March 2020. What people have taken a lot of comfort from is that this is a temporary move. This isn’t rates expected to go to the moon and there’s no real parameters around it. Rather, it is, ‘how high do we go for a temporary blip in higher inflation expectations and an adjustment to us?’ So from a pricing perspective, what we’ve had to focus on is convexity and duration. What we haven’t focused on is the noise in the interim, because EM spreads have been very stable during this period, which makes the pricing easier because really you’re trying to manage one end.

Dan Barnes: And then in terms of electronic trading vs voice trading, how have you seen activity levels change from outside?

Chris Perryman: From outside we’ve changed very little. I think what we’ve had to do is tweak a little bit where, as I say, those wobbles that I described, we typically trade maybe a small block of risk on an electronic platform. We’ve moved that to voice just to control where we want the price to go. But overall, liquidity hasn’t really been a challenge. It’s just been something we’ve had to work a little bit with. These are tweaks as I say, so again, if we refer back to March last year, that was a different level of liquidity challenge.

Dan Barnes: What approaches have your traders has been taking in order to get best execution on behalf of your investors?

Chris Perryman: What we’ve asked the traders to focus on is what’s driving the market, which is fundamentals. So talking to the analysts on a daily basis to update their views on the names that we have very high conviction on. So then they can really focus in on curve anomalies that are created, perhaps by the wobbles that we’ve seen in the Treasury markets. What’s really driven the market in terms of our value opportunities has been the idiosyncratic stories. So for us, we really look to add value and give trade ideas around those, more than the rates story.

Dan Barnes: How is your role as a price taker changing?

Chris Perryman: What we’ve had to evolve, is understanding where we want to buy risk and our degree of confidence to trade this connectivity to analysts. Now, on the corporate side, we have 13 analysts. On the other side, we have four analysts, and we need that depth of understanding of the market to understand, it’s not that we market making, but it’s to understand where we want to take risk and at what price. Because what we find now, increasingly, is the street doesn’t have the debt for the book to be that risk-taking model anymore. So what they really are is a risk transfer agent, and it’s really for us to decide what price do we want to take that risk.

Dan Barnes: Presumably that makes a significant difference. Your ability to deliver returns to investors?

Chris Perryman: Yeah, if you look at where the asset mixes and who holds the assets, if you look at how our markets evolve, it’s the local owners and large institutional asset managers that own EM. This is a very stable asset base. They look at long-term holdings with long-term return objectives. So the shorter term noise gets washed out in a much smaller period of time. So what we see is, you know, now those momentum trades where there’s a head line of outflows; maybe they last two or three days, they don’t last months as they historically have, and that’s a much greater opportunity set for us to take long-term views with strong fundamentals driving.

Dan Barnes: That’s been fantastic. Thanks very much, Chris.

Chris Perryman: Thank you.

Dan Barnes: I’d like to thank Chris for his insights today, and of course you for watching. t To catch up on our other episodes, go to TRADERTV.NET.