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12 | ifr special report | April 2008 NON-CORE BOND MARKETS ROUNDTABLE

People have to know what they

are getting into and understand what the risks are and feel that they are getting compensation for that.

Isabelle Laurent: People have to know what they are getting into and understand what the risks are and feel that they are getting compensation for that. I don’t think that has been the case in the mainstream markets, however. They bought things that they thought were Triple A or were large issues and likely to be liquid, they bought them in mainstream currencies that have had very significant movements in exchange rates, as we have noted, and, therefore, the world is turned on its head at the moment.

IFR: So the emerging markets have become the core markets. But how about the liquidity of these markets: is that holding up fairly well with respect to market commitments being honoured across the Street?

Moti Jungreis: In fairness, there has been very little selling: there has been no exiting. With the Icelandic krona depre- ciating so much, you would think that it would be driven by international investors getting out, but there has been no real selling. There have been bits and pieces here and there, but there has been no stress on the liquidity.

Horst Seissinger: Does that mean that in these types of currencies the share of buy-and-hold investors is different compared to other currencies?

Moti Jungreis: Absolutely. I think they are definitely buying more now.

Horst Seissinger: Which is a big advantage.

Isabelle Laurent: But much of that comes from the fact that the investor base is actually now much broader with very different dynamics. We are not just talking about the same kind of investors that we were talking about back in the 1990s.

Holger Kron: What we experienced last year was that sometimes you have one investor group leaving the market, but at the same time you have new investors coming in and saying: “this is very interesting, we want this stuff”. We have especially seen that in the Scandinavian currencies. You had one investor group selling, and you had a new one coming in, picking up paper and even demanding more than was sold. So, from this perspective, the global environment for niche currencies has really developed in three dimensions. You have one dimension, which is market depth, the sort of maturities you could trade, the sort of size you could trade and the sort of market-makers that would give you prices. Then, you have the second dimension

with the trading houses, in that now you can get 18 or 20 prices on a Turkish lira bond. If you look two years back, you would find five to seven prices, and even those would not work: now you have 20 people competing on a trade. The third dimension is definitely the investor base. You have it expanding globally, you have Asia coming in to emerging market currencies, you have US investors and you even have Latin American investors reinvesting their dollars in other currencies to diversify themselves. You also have the Middle East with petro- dollars, and they are really going in for different markets now. So, the entire community in niche currencies is expanding, which is really supportive for those markets in the medium term, because some will find interesting points to step in, while others will step out — if there is no key crisis in the background.

Paul Johnson: And there has been a relative absence of hot money as well: you haven’t got the leveraged players there. It tends to be real-return, real- money investors. So there is not a push for the door at the moment.

Holger Kron: Apart from ISK.

Paul Johnson: There are certain pockets, perhaps.

Moti Jungreis: But we do not even know who is pushing that right now. It looks more like it is the local banks. There hasn’t really been any push from the in- ternational investors.

Holger Kron: I wouldn’t say it is the ISK investor, I think it is the ISK credit- holder who is pushing indirectly via the banks.

David Smith: The benefit that emerging markets have is that it is a growing asset class. But it is not a mature asset class, so you are seeing net inflows into the sector. Over the last two years, there has probably been US$30bn–$35bn a year, of which last year 55% is going to local markets. So, there are no real outflows from emerging markets and any little bit of selling is going to be dwarfed by the inflows into the sector. So, the liquidity bid in the Street is from new investor money coming in, whether it be from Asia, Japan or the US. But also, historically, if you have held

out through the crisis, you have emerged making money: those people who have cut have always suffered worst. So, right now, people are banking on history repeating itself along with the new inflows, and saying: “if I get out now, sure, things can get worse, but equally, history is going to suggest that if I bail out, then invariably I am crystallising losses as opposed to weathering some short-term volatility”.

IFR: We have mentioned greater US account involvement. Are those US holders in the buy-and-hold category of investors, or have they looked to turn it around?

Moti Jungreis: With the US investors, the one thing that we have to understand is that they are buying diversity out of the dollar. So, they are buying Turkish lira or Icelandic krona, or whatever is, because they are looking for high-yielding currencies away from the dollar, and I do not think, at this point, any one of them will panic at corrections. Even the Icelandic krona with the sell-off of the last month or two depreciated 30% against the euro, but only about 10% or 15% against the

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