EM bonds trade quietly; rate move in focus; Bahrain’s oil paper strong; Venezuela weak

By Rebecca Melvin

New York, Oct. 20 – Emerging market credit traded quietly and spreads were narrowly mixed on Friday as market players watched a push higher in U.S. Treasury rates, a market source said.

The “rates move was the biggest event of the day,” the market source said. Meanwhile, the trading session was quiet particularly into the market close.

The yield on the benchmark 10-year U.S. Treasury jumped on news that the U.S. Senate adopted by 51-49 votes a budget blueprint for 2018, which raises hopes for U.S. tax reform. Then rates continued to climb through Friday’s session, ending up at 2.383% for the 10-year notes, which was up 6 basis points on the day.

Investors continued to watch for indications of a decision by President Donald Trump on the next chief of the U.S. central bank. Trump said this week that a decision will be announced soon, and he has met with all five candidates, but there were rumors that current Federal Reserve governor Jerome Powell will be Trump’s choice and that Powell is unlikely to shift policy significantly away from the current course of Fed chair Janet Yellen.

Yellen is viewed as the most dovish of the five candidates in the running, but Powell is viewed as closest to her in regard to monetary policy, according to reports.

Former Fed governor Kevin Warsh and Stanford University economist John Taylor are the most hawkish choices, and White House economic advisor Gary Cohn is a fifth candidate but seen as unlikely to make the final cut.

For now, the Fed is forecasting three interest rate hikes next year, and Yellen is expected to raise rates one more time in December before either she is re-nominated or a successor takes the helm.

Among notes trading on Friday, Bahrain’s new Nogaholding 7˝% notes due 2027 traded higher to 102 bid, 101.2 offered, up from 101.85 bid, 101.95 offered on its debut on Thursday. The sovereign priced $1 billion of the oil and gas notes tighter than initial talk and at a spread of 516.2 bps over U.S. Treasuries.

The spread on the new notes was tighter by about 9 bps on Friday, according to a market source. Meanwhile, the Bahrain sovereign curve was mixed, but widening moves were more pronounced than the moves of paper that tightened.

Elsewhere, “people were getting nervous about next week amortizations” of Venezuela and Petroleos de Venezuela SA bonds.

There was “lots of supply,” an East Coast-based trader said on Friday.

The Venezuela and PDVSA bonds have gradually weakened for much of the week after Sunday’s regional elections in Venezuela revealed a resounding but unexpected victory for the ruling socialist party. On Monday, most of the curve was down by about 2 points.

The PDVSA notes due 2017, which mature Nov. 2, 2017, were seen 92 bid, 94 offered on Friday.

A note that is amortizing next week, the PDVSA 2020 notes, was quoted at 83 bid, 84 offered. That bond has a one-quarter amortization next Friday.

The PDVSA 2026 notes have slumped to 28 bid, 29 offered, and the Venezuela 2022 bonds were quite a bit better at 42 bid, 43 offered, but still down from 44 bid, 45 offered on Wednesday.

The Venezuela 2026 bonds were down at 37 bid, 38 offered, and the Venezuela bonds due 2031 were up about 50 cents from that level at 37˝ bid, 38˝ offered.

Traders have put the political situation on the back burner – accepting that regime change is not going to come any time soon – and is currently worried about debt payments, including not only those due next week, but also a handful of notes that have coupon payments due from last week.

Payments due last week on five issues included a $28 million coupon payment for the Electricidad de Caracas bond that matures in 2018, $81 million for PDVSA 2027s, $41 million for PDVSA 2037s, $97 million for Venezuela 2019s and $103 million for Venezuela 2024s.

On Sunday, loyalists to President Nicolas Maduro’s ruling socialist party managed to win 18 out of 23 state governor posts. This was opposite of the expectation that opposition candidates would win a majority of those posts.

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