Emerging Market Bonds : Indo 37 Pain

This past 2 weeks, many emerging market bond traders got clobbered for holding long Indo-37 bond (Indonesian US Dollar government bond maturing in 20 years) positions. The positions were basically a long duration play, betting that the U.S Fed fund rate will be lowered this year.

Well, the recent turmoil in the equity market led to significant buying of U.S. Treasuries, driving the yield lower, price higher. But the Indo-37 price continued to slide down. what’s going on?

Apparently those traders forgot about spread duration. Yes, the U.S. treasury yields went down, but the Indo-U.S spread widened from near 100 bp earlier this year to above 200 bp. Naturally, in the midst of a market turmoil, there will be a flight to quality activities going on in the market. Emerging market papers will be dumped in favour of higher credit quality papers. This, of course will drive the spread between emerging market papers and U.S. Treasury wider. And that’s what happened to Indo-37.


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