巴黎银行-新兴市场-信贷市场-新兴市场主权信贷：对冲成本HST与美国企业HY规则-20190117-9页_529kb

Summary of EM Sovereign Credit Analysis: Cost of Hedging UST and US Corporate HY

Core Content

This document analyzes the current drivers of Emerging Markets (EM) sovereign credit risk, emphasizing the growing influence of external financial factors, particularly the performance of U.S. Treasury (UST) and U.S. Corporate High Yield (HY) markets. The authors, Gabriel Gersztein and Samuel Castro from BNP Paribas, use a principal component analysis (PCA) to identify the most significant variables affecting EM sovereign credit risk, highlighting a shift from traditional indicators to more recent, systemic factors.

Main Viewpoints

• External Financial Factors Dominate: The analysis shows that the cost of hedging UST and US Corporate HY is now the most important driver for EM sovereign credit risk, surpassing conventional indicators like U.S. real interest rates, break-evens, and crude oil prices.

• PCA Framework: A PCA framework is used to monitor the relationship between EM credit and external factors. The first three principal components explain approximately 90% of the variability in EM sovereign credit risk.

• Short-term Risk Sensitivity: The risk associated with EM sovereign and quasi-sovereign yields is more sensitive to short-term changes in U.S. corporate credit performance, which could lead to rapid yield widening.

• Country-specific Variations: While the majority of EM sovereign credit is influenced by external factors, Brazil shows a higher influence from domestic variables such as presidential elections and economic expectations.

Key Information

• Proxy for Credit Risk: A basket of liquid 5-year Credit Default Swaps (CDS) is used as a proxy for EM sovereign credit risk.

• Rolling Window: The analysis uses a 35-week rolling window to calculate the principal components and their co-variance with market variables.

• Market Factors: The first and second principal components are strongly correlated with U.S. money market conditions, the U.S. dollar, and U.S. Corporate HY performance.

• Co-variance Changes: The co-variance between the second market component and the U.S. euro-hedged Xccy basis has increased significantly from 8% in July 2018 to 69% as of January 2019.

• Conventional Indicators: Traditional indicators such as U.S. real interest rates, break-evens, and crude oil have lost their explanatory power in the recent period.

Analysis Results

• Top Drivers: The first and second market components are most influenced by:

  • U.S. money market conditions
  • U.S. dollar index
  • U.S. Corporate HY performance
  • U.S. Euro-hedged Xccy basis

• Country-Specific Co-variance:

  • Brazil: 60% of variation is explained by domestic factors.
  • Turkey: 99.2% explained by the first market factor.
  • Mexico: 86.3% explained by the second market factor.
  • South Africa: 93.8% explained by the first market factor.
  • Russia: 80.5% explained by the first market factor.
  • EM 5y CDX: 95.7% explained by the first market factor.

• Implications: The results support the view that EM sovereign credit is increasingly dependent on external financial conditions and U.S. corporate HY performance, rather than domestic factors.

Strategic Position

• Long Position: The authors are long 5-year Argentina CDS, hedged with a basket of Brazil, Colombia, and Mexico 5-year CDS.

• Short Position: They are short 5-year Turkey CDS, based on their factor model and a better-than-consensus scenario for Turkish risk assets.

Legal and Regulatory Notes

• Non-independent Research: This document is non-independent research and may be subject to conflicts of interest.

• Marketing Communication: It is a marketing communication and not investment research, intended for professional clients and eligible counterparties.

• Confidentiality: The information is provided on a strictly confidential basis and may not be reproduced or distributed without prior written consent.

• Disclaimer: BNPP does not accept liability for any loss arising from the use of this document and does not provide investment, financial, legal, or tax advice.

• Performance Data: Any performance data is based on back-testing and is for illustrative purposes only, not indicative of future results.

• ETF and Option Disclosures: The document includes important disclosures regarding ETFs and options, emphasizing the risks involved and the suitability for sophisticated investors.

Conclusion

The analysis concludes that external, systemic factors are the primary drivers of EM sovereign credit risk, with the exception of Brazil. The performance of U.S. corporate HY and U.S. dollar yield is closely linked to EM sovereign and corporate credit, suggesting a heightened sensitivity to U.S. financial conditions. The authors continue to monitor these dynamics closely and advise ongoing vigilance in case of deterioration in the external financial channel.