Mexico long bonds rally; Argentina drops; EM debt overall improves on China strength

By Rebecca Melvin

New York, June 29 – Mexico’s long bonds rallied on Friday, while the sovereign’s short-dated bonds were little changed ahead of the country’s presidential election on Sunday when it is widely expected that frontrunner Andres Manuel Lopez Obrador, or AMLO, of the National Regeneration Movement, will be elected.

Mexico’s credit on the long end improved by ¾ point, and credit default swaps tightened 9 basis points. The five-year notes were little changed, but Mexico was rallying for the past couple of days, Stifel’s emerging markets sovereign desk strategist Victor Fu said.

“Maybe the market believes AMLO will not be as bad as they thought,” Fu said. “Recently AMLO has softened his tone and is not sounding as radical as before.”

But market confidence was ebbing away for Argentina. The Argentine peso slid another 2.5% on Friday to 28.8 against the U.S. dollar, a new record, putting the currency at a 7% loss for the week.

“It seems the Argie government has lost all confidence in the market,” a New York-based trader of Latin America debt said via e-mail.

The government has tried to stem the currency fall in several ways, but soaring inflation and the currency free fall has persisted. The current drop came despite efforts by the country’s central bank to halt the slide by upping the size of its daily dollar for peso auction to $150 million on Thursday and Friday.

Last month the Argentine central bank raised rates to 40%, the world’s highest rate. The government also went to the International Monetary Fund for help and was able to ink a $50 billion IMF backstop, which was also the world’s largest IMF bailout. There have also been leadership shakeups, with Luis Caputo, finance minister and former Wall Street executive, taking the helm of the central bank on June 14. But while these measures restored calm for a few days, the effects were not long lasting.

Concerns are growing that President Mauricio Macri will be unable to remain committed to his pro-business agenda and economic reforms. And the sharp currency drop has investors on edge about the country falling back into a recession this year, only two years after emerging from its previous one.

Emerging markets debt overall opened on a positive note on Friday with some buying heading into month- and quarter-end, but the gains mostly faded by the end of the day, and a negative tone pervaded much of the past week. For the week ended June 27, there were emerging market bond fund outflows of $1.2 billion for both hard-currency and local-currency funds, according to data tracker EPFR Global.

But a rebound in China stocks overnight Thursday and positive comments by China’s central bank had encouraged investors initially.

China stocks turned positive overnight after almost 10 days of declines. In addition, the People’s Bank of China changed the wording of its statement a little bit after its latest meeting, saying it would keep liquidity “appropriately abundant,” as opposed to “appropriately stable” previously. That suggests looser policy compared to previous language, Fu said.

“Today, most of EM rallied. It was a relief rally from encouraging China stocks,” Fu said. But that looser central bank policy promises to be negative for the yuan in the longer run. The move might be worth a few days of strength, Fu said, before the economics of the policy begins to work toward faster depreciation.

Meanwhile, the market will be watching for important U.S. economic data next week including ISM data and the monthly payrolls report, which will be released amid a holiday-shortened week in observance of the U.S. Independence Day on July 4. Those figures will strongly influence the U.S. dollar, which was another factor in the drain from emerging markets.

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