Lat-Am spreads tighten; investors still ‘sitting on sidelines’; South Africa gets attention

By Christine Van Dusen

Atlanta, Feb. 25 – Emerging markets assets put in a mostly positive session on Thursday, with Latin American spreads unchanged to tighter, as investors watched China ahead of the G20 meeting in Shanghai.

Mexico’s five-year credit default swaps spreads were unchanged at 196 basis points, and Brazil’s closed at 452 basis points from 451 bps, but “the bid still feels firm,” a New York-based trader said.

“Cash prices continue a relentless move higher, as dollar levels outperform any amount of spread tightening in the CDS world,” he said.

Latin American high yield names were up on the day, with Venezuela’s 2027s moving to 39.75 from 38, PDVSA’s 2017s ending at 48.25 from 45 and Argentina’s Bonar 2024s at 108 from 107.25.

“Flows continue to see better buyers of EM paper, with the occasional seller here and there,” he said. “North American markets appear to be dismissing overnight weakness in Asia as we rally in the face of sell-offs in China.”

Overall, it still seemed as though “accounts are sitting on sidelines, ready to add rather then selling aggressively,” a trader said. “One way to tell is that is front end paper is less squeezed than before, in certain places.”

Thursday also saw investors digesting two rating decisions: Moody’s Investors Service downgraded Brazil to junk, mirroring recent decisions from Standard & Poor’s and Fitch Ratings.

Moody’s “highlighted the prospect of a weak growth environment and the challenging political dynamics that will lead to deterioration in debt metrics and fiscal consolidation efforts,” a trader said.

Brazil in focus

Brazil’s 2045s saw some buying, while the 2019s, 2021s and 2023s saw sellers.

“Since the first week of February, the curve in Brazil has steepened massively,” another trader said. “It has steepened in rallies, it has steepened in sell-offs, it has steepened in quiet days.”

The 2021s outperformed, he said.

“The curve is steeper now even than it was last August,” he said. “It makes no sense.”

Uruguay well-bid

Looking to Uruguay, the sovereign curve was well-bid on Thursday, another trader said.

“The 2045s are starting to look very rich, versus the 2036s,” he said. “There was some buying interest in the 2036s today, which may have been attributed to this kink in the long end of the curve and relative value of this maturity.”

South Africa cuts forecast

South Africa received some attention on Thursday after the finance minister said the Treasury would cut its growth forecast for 2016 to 0.9%, down from 1.7% in October.

“Market participants were hoping for Finance Minister [Pravin] Gordhan to act as a magician,” a strategist said. “In his speech, Gordhan delivered the expected broad-based tax increases – capital gains, fuel levy, sugar drinks, alcoholic drinks, tobacco – and budget cuts.”

In an attempt to target a fiscal deficit of 3.2% of gross domestic product in the 2016 to 2017 year, the sovereign is looking to issue $1 billion of bonds by the end of March.

“The subsequent market reaction is no surprise, given that many investors previously had bought into the story of Gordhan defending the republic’s investment grade rating,” the strategist said. “In our opinion, Gordhan delivered on the budget improvements, but lacked in providing a clear path on future economic growth.”

MTN pays some of fine

In other news from South Africa, Johannesburg-based MTN Group Ltd. made a “good faith payment” on the $3.9 billion fine imposed last year after the telecommunications company missed a deadline related to disconnecting unregistered SIM cards.

“Investors took this as a signal that an out-of-court settlement is becoming closer, although the final penalty amount is still the elephant in the room,” the strategist said. “As usual, the company urges investors to exercise caution until a further announcement is made.”

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