Report25 May 2018Updated about 2 months ago

Global debt flows: Exposure build-up in Turkey and Italy amplified pain

Investors had been building allocations to both Turkey and Italy through April, which no doubt exacerbated the subsequent selling seen in recent weeks. Here's our monthly data flow report

Executive summary

We note that investors had been building allocations to both Turkey and Italy through April, which no doubt exacerbated the subsequent selling seen in recent weeks.

We also find that allocations to Germany were at their lowest of the year at end April and well below normal, so an element of short covering there added to the recent bid to Bunds.

Latest flows data also show reasonable buying in inflation-linked funds plus some nibbling in corporates.

High yield and emerging markets outflows have ground to a halt for the latest week, but the underlying trend is still a leakage. High yield though is weathering things far better.


Six things learnt from latest flows data

1) The flows data show a clear build in exposure to core Government front-end funds and a reduction in exposure to long end funds, thus marking a market-wide duration short. There has been less selling of corporates though.

2) We note a clear long Italy / short Germany tendency (exposure to Germany was especially underweighted) built through April, which we think exacerbated the BTP spread widening and lower bund yield trajectory in recent weeks.

3) High yield has continued to see aggregate outflows in the past month, but they are quite muted now, and for a change contrast positively with the much bigger outflows seen from emerging markets in previous weeks.

4) The high yield space is weathering better the strong dollar / higher rates combo that has crippled emerging markets, although the latter has also had to deal with some notable idiosyncratic risks (eg Turkey, Argentina a.o).

5) Outflows from emerging markets dominated in the past month, with retail selling hard currency while professionals liquidated local currency. For the latest week, more subdued conditions are in play, summing to only mild outflows.

6) Turkey has been central to the outflows theme. Turkey, in fact, saw allocations rise through April, which likely added to the pain then seen through May. Turkey saw inflows again for the latest week (still vulnerable though).