HSBC Says EM Bond Demand Buckling

"At a time of rising yields and volatility, demand at EM bond auctions is beginning to buckle. A similar trait was seen in last month's US 7-year T.Note auction and this week's US 10-year and 30-year re-opening auctions will be another important gauge. High frequency bond flow data also indicates dwindling foreign appetite for EM bonds. This has placed a further onus on some EM central banks to step in and fill the void with bond purchases."

• "As usual, EM debt, in particular some high yielders, has already been rocked by a jump in US Treasury yields, although as indicated before China has continued, and is likely to continue, to prove resilient. While EM rates are at risk of further market volatility we don't expect to see a full blown rerun of the 2013 'taper tantrum' . Still, previous episodes of sharp increases in US rates show a disproportionate impact on EM bond yields. A major factor to watch is EM capital outflows which were big in 2013 and exacerbated the situation. This time round, foreign funds have already left in droves last year in response to the pandemic and, in total, the size of EM bond outflows in 2020 has already surpassed the outflows seen in 2013. Whilst this may soften the extent of further capitulation this year, the amount of bond supply that needs to be absorbed in EM is decidedly challenging to say the least."