Investors nervous over Middle East violence, Brazilian political pressures

By Reshmi Basu and Paul A. Harris

New York, March 22 -Emerging market bond trading slid into still waters Monday as investors remained uneasy in the aftermath of the killing of Hamas founder Sheikh Ahmed Yassin by an Israeli missile Sunday.

"It's been a quiet day," said a trader. "Everyone is afraid of increased violence and retaliation."

The J.P. Morgan emerging market bond index (EMBI) slipped 0.21% by late afternoon. Its spread to Treasuries widened nine basis points over heightened geopolitical concerns.

"The session was pretty quiet overall, dominated by the news in the Middle East," said a source.

But Brazil took one of the biggest hits Monday.

Brazil's benchmark C bonds were down about 7/8 to 97 3/8 bid late in day. The bond due 2040 was down over 11/2, bid at 107.75.

However, the main cause for Brazil's tumble was due to increased disenchantment with the government's tight monetary policy, according to a fund manager.

Members of President Luiz Inacio Lula da Silva's Workers' Party, including 15 lower-house congressmen, said they wanted to see government policy do more to stimulate growth.

"This weekend, a few Workers' party members called for changes in the economic and monetary policy - a looser fiscal policy," the fund manager said.

"A number of things [that were said were] very populist which would allow for rapid growth in the economy. None of the cabinet members or government officials were at that meeting. It tells you that there is definitely pressure for growth in government."

Brazil's component of the EMBI index was down 1.43% at 386.86 at late afternoon. Its spread widened 26 basis points.

Brazil's bonds had been rising in the second half of last week after the country's central bank late Wednesday cut interest rates by 25 basis points to 16.25%, the first reduction this year.

But generally in emerging markets the violence in the Middle East pushed trading into neutral, according to the fund manager.

"It has been really, really quiet day."

Optimism on Argentina approval

In Argentina, the International Monetary Fund approved a second review of Argentina's standby credit arrangement, clearing the way for the release of a $3.1 billion loan installment.

In early March, the Argentine government threatened to default on its IMF loan payment unless it received assurances that the IMF board would release the $3.1 billion loan.

The IMF had shown disapproval with Argentine's "good faith" negotiations with creditors holding $81 billion dollars in bonds that defaulted in January 2001, and threatened to withdraw an installment of a loan package agreement made in September.

Argentina, which defaulted on its public debt in January 2002, will only be required to pay interest under the deal.

"It does look as if the IMF is cutting Argentina some slack, but the agreement to raise utility prices was a significant victory for the IMF and for the economy as a whole," said an analyst.

"Bondholders are cautiously optimistic that Argentina, after finalizing an IMF agreement, can begin to negotiate in earnest with its creditors, but there are still plenty of questions to be answered."

"There are now higher expectations for payment of PDI [past-due interest], and for a final deal that offers a 75% NPV [net present value] haircut, not a 75% principal haircut, plus restructured PDI. That would mean the restructured bonds could emerge slightly higher than current prices and could presumably appreciate over time. That's still a lot of what ifs, though," added the analyst.

The EMBI component for Argentina fell 0.47% in late afternoon. Its spread widened 18 basis points.

Croatia to launch roadshow

On the new issue front the Republic of Croatia plans to start a roadshow all next week for its €500 million 10-year bond offering (Baa3/BBB-), according to a market source.

The roadshow will start next Monday in Athens, followed by Frankfurt and Munich on Tuesday, Vienna and the Netherlands on Wednesday, Zurich on Thursday and finishing off in London on Friday.

UBS Investment Bank and JP Morgan are running the Regulation S only deal.

The issue is expected to price in April.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.