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Having exposed the many dominoes that are falling behind the high yield bond market previously, BofA's high yield strategy team are fearful that significant weakness in Emerging Market assets adds one more reason to remain cautious in markets.
If this was not enough to make credit market participants nervous...
BofA - Oleg - Melentyev - Neha - Khoda
Then BofA's Oleg Melentyev and Neha Khoda point out that last week it was Italy; earlier this week it was Turkey; now it is Brazil.
This week alone, the 2yr yields have gone up by 110bps in Turkey and 120bps in Brazil. This move was a culmination of a process that was accelerating over the past few months: the average EM sovereign local currency yield has gone up by 190bps since early May and by 255bps since late February.
Yields - Thursday - Environment
We think a sharp 10bps intraday move lower in 10yr yields on Thursday is indicative of this environment.
Critically, BofA's analysts point out:
Rates - Victim - Success - Further - Vulnerability
Rates are falling victim of their own success, where the further they go up the more vulnerability in risk assets they expose, leading to a negative change in risk sentiment and their own eventual reversal.
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