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The COVID-19 emergency is causing SSA bonds denominated in EM currencies to correct despite their high ratings. Bonds denominated in TRY and IDR are amongst the biggest movers, which may translate into a market opportunity, according to strategists at TD Securities.

Key quotes

“The spread of TRY SSA yields to govies has widened and is now positive for 1-3Y maturities. This also happened in the recent past during the August 2018 lira crisis, and the March 2019 liquidity squeeze. We do observe some similarities in these moves. The reversal of spreads from negative to positive tends to be shortlived and poses the opportunity to position for an opposite reversal soon.”

“IDR SSAs are known underperformers (vs govies) during sell-offs. We note that should spreads to govies widen further to 200-300bps, the mean-reverting behaviour of SSA bonds should lead to the outperformance of short-dated bonds.”