Analysis of past energy supply shocks reveals a persistent sell-off in emerging market rates for several months. Conversely, the impact on EM currencies is inconsistent, with the broader US dollar environment often proving to be a more significant driver than the energy shock itself, presenting a nuanced view for investors.
While emerging market sovereign credit spreads have widened only slightly, the real threat to lower-rated countries comes from the sharp sell-off in US Treasuries. This pushes the total 'all-in' borrowing yield significantly higher, threatening market access for frontier markets even if their specific risk premium remains contained.
Venezuela's bonds trading at 50 cents on the dollar seem high, but this price only reflects principal. Factoring in nearly a decade of high, unpaid coupon payments (past-due interest) means the price relative to the total claim is much lower, in the 20-25 cent range. This technical detail completely reframes the bonds' valuation.
During crises, some emerging market central banks intervene to slow currency depreciation. This creates a divergence between currencies that react strongly to market shocks and those whose reactions are artificially suppressed. This asymmetry provides a basis for relative value trades, allowing investors to capitalize on the mismatched price action.