Last month I commented on the long term headwinds facing Asia and tried to cut through the sales cheese (see here). The last few weeks have seen more evidence of a slowdown in Asia, and seemingly more people buying into the EMD story as valuations in a number of countries have hit extremely expensive levels. Taking one example, in the middle of last week the $2.25bn issue of Peru 7.35% 2025s reached a yield spread of 109 basis points over US Treasuries. Liquidity on the bond is not fantastic, with a bid-offer spread of 1% on screens, implying that over a one year time horizon the yield spread is an illiquidity premium, with almost zero credit risk priced in. Spreads are reaching levels of the super liquid days prior to 2008. Bubbletastic.
Some charts below.
As discussed last month, Chinese growth has been highly dependent upon excessive investment growth. This has been driven by construction, which has been reliant on steel. So it’s interesting that steel prices have fallen 25% in the last year in China.