Weak environment hurts EM; Lat-Am drops, then stages mini-rally; Ukraine gets attention

By Christine Van Dusen

Atlanta, Feb. 11 – Emerging markets bonds were weak on Thursday, with cash spreads widening by 20 basis points and credit default swaps spreads moving out 15 bps, on trouble in the larger markets.

“Wider markets are causing more EM pain, but you only have to look at how corporate is outperforming to see we are actually performing quite well,” a trader said. “Flows are still anemic, as investors watch for target credits to cheapen up.”

It was a busy morning session for Pakistan, with the sovereign’s 2025s trading at 98¾ bid, 99¾ offered.

But overall, “on flows we are still not seeing lots of paper hit the market,” a trader said. “If anything, I think paper was taken out of the Street.”

Playing a role in all this was Federal Reserve President Janet Yellen, who on Wednesday said less-supportive financial conditions in the United States – as well as equity price declines, higher borrowing rates and appreciation of the dollar – could weigh on the outlook for economic activity.

“A rate hike in March is therefore seen as very unlikely although Yellen also reiterated that the Fed would continue to pursue plans of gradual hikes,” a strategist said.

Trading of Latin American names was “timid” on Thursday, though in the morning many names traded off their lows and some buyers surfaced, a New York-based trader said.

Still, “better selling remains the overall theme, for now,” he said.

Brazil-based Petroleo Brasileiro SA and Vale SA were among the names to move a little bit higher, “although Street bids are still pulled back, markedly, telling me that buying is quite selective and position-oriented,” he said.

Lat-Am rebounds slightly

In the afternoon, some Latin American names rebounded slightly, another trader said.

“With Treasuries and gold up and equities down, all signs pointed to an extremely weak day of trading in Lat-Am credit,” he said. “But with persistent bidding in parts of certain low-beta sovereign curves as well as some afternoon OPEC help, the day is closing down but off the lows.”

Mexican cash bonds, however, “were extremely volatile,” he said. “The short end was once again very well bid, finishing flat to tight on the day.”

Brazil saw very little trading while Venezuela took a hit, he said.

“In the afternoon, chatter of OPEC price coordination combined with the Venezuelan government stating that they would be paying the coupon on the PDVSA 2022s caused a mini-rally,” he said. “The bonds are closing down between 1 point and 1½ points.”

Lat-Am CDS widen

Five-year credit default swaps spreads for Brazil closed at 514 bps from 495 bps, while Mexico’s ended at 233 bps from 223 bps.

“Cash prices were whipped around by heightened U.S. Treasury volatility, which saw intraday moves of more than 10 bps across the curve,” another trader said. “We finish the day a bit lower, but off our lows, and with bids cautiously creeping back into the market.”

Argentina was weaker, but not by much, with the Bonar 2024s closing at 106.75 from 107.25.

“Today’s session truly characterized the current environment of uncertainty in global markets,” he said. “This is all happening with China out this week, which was supposed to be cause for calmer waters.”

Ukraine urged to reform

Market-watchers were also talking about Ukraine, which was urged to speed up reforms for state-owned companies to fight corruption.

“Yesterday, the International Monetary Fund’s comments over the Ukraine bailout were much tougher than those at the beginning of the week,” according to a report from Schildershoven Finance BV. “The IMF warned that Ukraine’s $17.5-billion bailout might be halted without progress on the reform.”

Ukraine tumbles

Ukraine's bonds have “tumbled,” a trader said. “While we do not expect the IMF to cut off Ukraine’s lifeline – a four-year $17.5 billion bailout program – such a move would leave the country devastated.”

The president later promised to commit to reforms.

“Sovereign bonds may slightly rebound today, following several days of correction,” the report said.

Middle East in ‘stranglehold’

Looking to the Middle East, bonds started off “brightly enough” before broader markets put “a stranglehold on proceedings,” a London-based trader said. “Thus we end up with some decent spread widening.”

Qatar’s spreads moved out 10 bps, and Abu Dhabi’s widened 10 bps to 15 bps.

“Perpetuals have been ticking along, with demand for the Islamic ones of late,” he said.

Africa in focus

Nigeria also received some attention on Thursday, following the conclusion of its roadshow for $1 billion of bonds.

“Nigeria also plans to tap concessional financing from IFIs, including loans from the World Bank and the African Development Bank,” the strategist said. “The funds would mainly be used to plug the budget deficit.”

In other news from Africa, South Africa’s president was set to deliver the annual state of the union address as investors awaited “some actual improvements in the economy,” he said.

“The country is still at the edge of a downgrade to junk,” he said.

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