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.
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.
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.
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.