Buyers lift EM debt again in light volume; MENA mostly tighter, but Bahrain underperforms

By Rebecca Melvin

New York, July 6 – Investors turned buyers of emerging markets debt this past week, lifting prices for a third straight day – albeit on slim summer volume – on Friday as markets quieted into the weekend amid distractions like the soccer World Cup and vacations, a London-based trader said.

Volume was also curbed by the holiday-shortened week in the United States where financial markets were closed on Wednesday in observance of Independence Day.

“There’s decent buying,” the trader said, noting South Africa and other Africa sovereigns were doing well, as were Egypt and other high-beta Middle East names. But Bahrain was a laggard.

African spreads were tighter by 15 basis points to 25 bps, but Bahrain was wider by 5 bps to 10 bps, the trader said.

The buoyancy was attributed to investors wanting to put money back to work in the face of a lack of new supply and amid some short covering, despite news that the first set of trade tariffs imposed by the United States and China on the other’s imported goods was put in place and despite a strong U.S. June employment report that was deemed supportive of the U.S. central bank’s more assertive pace of tightening rates.

Bahrain’s sovereign credit curve, which saw a weaker short end compared to the long end on Friday, has been volatile this past week as investors weighed headlines regarding the Kingdom’s constrained finances.

Since Saudi Arabia, the United Arab Emirates and Kuwait pledged to provide a backstop for the sovereign two weeks ago there has been trending recovery, but there were blips when fears regarding debt restructuring torpedoed the credit. Bahrain has a $750 million Islamic bond that matures in November and is unlikely going to be able to gain access to the credit markets to refinance the paper.

But its allies are discussing all options regarding aid for Bahrain as part of an integrated program put in place to support economic reforms and fiscal stability.

“The general consensus is that the Saudis, UAE and Kuwait will come through with some sort of support package and that is in the background,” a market source said.

In Latin America, Mexico’s bonds improved this past week after a weaker Monday as the market responded to the as-expected victory of Andres Manuel Lopez Obrador, or AMLO, of the National Regeneration Movement, in the country’s presidential election on Sunday. The new leftist president-elect will take office on Dec. 1.

“Mexico is going to be worth watching; it stands to do pretty well if a trade war breaks out since it is generally competitive with China,” said Cameron Brandt of fund flows and asset allocation data tracker EPFR Global.

Mexico is an oil producer and higher oil prices stand to benefit the nation as well as the new administration gets set to square off with the Trump administration on a renegotiated North American Free Trade Agreement. AMLO does not plan to call for major changes to Mexico’s position in the renegotiation, Jesus Seade, AMLO’s chief negotiator, said this past week.

It “looks better,” Brandt said regarding the prospects for Mexico’s ongoing economic reforms.

“The broader backdrop is supportive with decent buying with investors definitely having money to put to work, and oil still doing okay,” Brandt said.

Brazil’s bonds were also doing better on Friday, but its path ahead politically is far less certain. The Latin American nation is the only country with elections still left to be held this year – something it holds in common with the United States – but it has no strong reform candidate campaigning for president, and of the handful of populists options, none are expected to move toward significant reforms, Brandt said.

Rede D’Or Sao Luiz SA’s 4.95% notes due 2028, which priced in January, added about 1/8 to ¼ point on Friday to 89.20, which is off as low notched on June 20 of 86.9. The hospital owner and operator’s notes priced Jan. 12.

Marfrig Global Foods SA’s 6 7/8% notes due 2025, while up about 0.2 point on Friday at 95.33, have slipped from the peak of its recent run at 95.54 on Monday. But the bonds of the Brazilian railroad and logistics company have been volatile this year, hitting a low of 90.65 on March 29.

New issuance may or may not materialize next week. It is possible that there is no real supply for five or six weeks, a market source said, noting that the lack of a primary will be supportive to secondary market pricing.

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