Emerging markets strong at month-end; Venezuela, PDVSA better bid, but clearing problems arise

By Rebecca Melvin

New York, Aug. 31 – Emerging markets spreads were mostly better again on Thursday on the back of month-end activity and ahead of what was expected to be a lull in activity on Friday, according to market sources.

“Super strong market,” a London-based trader said, noting that most issues were performing well ahead of the quiet day expected to precede the long holiday weekend in the United States in observance of Labor Day and as Muslim Eid holidays were underway. Markets are expected to reopen on Tuesday with a nearly full slate of personnel.

Bahrain was narrowly mixed on Thursday after the curve for that sovereign tightened by 7 to 10 basis points on Wednesday. Bahrain’s 6 1/8% notes due 2022 were indicated to have edged up on Thursday for a closing price of 104¼ bid, 104¾ offered, compared to 104.12 bid 104.87 offered on Wednesday. The bond’s spread, which tightened strongly on Wednesday, closed a couple of points narrower on Thursday.

Other Middle Eastern sovereigns also improved on Wednesday, including Oman, Kuwait and Qatar.

Wednesday and Thursday’s move was attributed to a bounce back from a widening on Tuesday related to heightened concerns over North Korea’s missile launch over Tokyo.

The move was mostly driven by interest rates and combined with month-end activity, which saw the majority of credits performing nicely, the London-based trader said.

Venezuela and Petroleos de Venezuela SA bonds were better bid in the early going on Thursday, but clearing problems were beginning to arise, according to market sources.

Prices were rebounding after news of a possible repurchase of Venezuela bonds by the Chinese, a trader said. And the expectation was that Venezuela would continue to be able to make debt payments in October and November.

But clearing problems were beginning to surface, with trades that could not settle because of clearing restrictions. It was unclear how widespread the problem was becoming.

On Wednesday the Depository Trust & Clearing Corp. said it would no longer settle certain trades of Venezuela and PDVSA bonds, but DTC later reinstated services.

One trader said early Thursday that he had not heard much about clearing problems but that he would not be surprised if more clearing firms decided to discontinue clearing trades of Venezuela bonds.

In addition to questionable DTC clearing, there was another major clearing house that refused to clear a trade due to the U.S. restrictions outlined last Friday, a trader aid.

Meanwhile, Cantor Fitzgerald LP has stopped trading Venezuela debt, following Credit Suisse’s lead earlier in the month.

Traders were wondering who would be next and where the next road block would be, but market activity continued unhampered for the most part.

Another situation brewing was how refinery production reductions in the United States would affect Venezuela after the devastation caused by flooding from Hurricane Harvey. Venezuela depends on the revenue from exports of crude oil to the Texas refineries.

The latest U.S. restrictions apply to trading of new bonds issued after June 1 or to trading with Venezuelan government entities. They do not prohibit U.S. firms from trading Venezuela debt.

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