EM bonds start new month under pressure after strong July; South Africa’s Eskom eyed

By Rebecca Melvin

New York, Aug. 1 – Emerging markets bonds were under pressure on Wednesday to start out the new month and as the U.S. Federal Reserve stood pat on rates as widely expected.

The weaker session, in which Turkey’s sovereign bonds extended a weeklong slide, followed on a generally strong EM bond secondary market for July, which saw positive fund flows for three straight weeks to support existing prices amid a lack of new paper.

Argentina and Petroleos Mexicanos SAB de CV were notable underperformers in the session. And Turkey’s bonds, which have been in the crosshairs of investor angst over the actions of president Recep Tayyip Erdogan that has been heedless of investor interests, were down again as the threat of U.S. sanctions loom.

Turkey’s 11 7/8% notes due 2030 were down 0.3% to 134.41 to yield 14.84% on the Luxembourg stock exchange on Wednesday. The notes, along with the rest of the sovereign curve, had a rocky month but mostly consolidated after a steep plunge in June. However, the 2030 notes have lost 1% in the last five sessions.

The Turkish lira crept higher to 4.93 to the U.S. dollar from 4.91 on Tuesday.

The Fed’s updated policy statement was in line with expectations and offered no signals that the central bank may shift away from its current path of gradual rate increases.

Eskom eyed for Thursday

The proposed dollar bond from South Africa’s Eskom Holdings SOC Ltd. was not forthcoming during the session but was expected to price on Thursday, a London-based syndicate source said.

The Johannesburg-based state-run utility is planning a government-guaranteed tranche and a non-guaranteed tranche.

“Overall it was a quiet trading session as we head into the summer lull, but we saw both high- and low- beta EM credits under pressure,” a New York-based market source said.

Pemex weakens

Pemex was weak as investors reacted to the announcement by president-elect Andres Manuel Lopez Obrador that the next chief executive officer for the oil company is a political ally with no oil background, a New York-based market source said.

Instead, the appointee, Octavio Romero Oropeza, is a career politician with a degree in agronomy. Romero replaces Carlos Trevino and will try to strengthen the company’s financial position at the same time that it needs to raise an additional $3 billion to $3.5 billion in debt by the end of 2019.

In the broader markets, U.S. Treasuries sold off a bit toward the end of the session following the Fed statement release after rallying in the early session on the back of chatter about additional U.S. tariffs on China exports.

The Federal Reserve was expected to keep its benchmark Federal Funds rate unchanged at 1¾% to 2%, and the stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2% inflation.

The risk of an escalating trade war as well as the stronger dollar and tighter liquidity by central banks are likely to continue to weigh on emerging markets going forward and may even cause another sell-off.

The yield on emerging market hard currency debt rose to its highest level in more than two years on June 19.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.