EM sovereign bonds drop with broader markets; Argentina volatile; LatAm primary still quiet

By Rebecca Melvin

New York, July 6 – Emerging markets were rattled on Thursday as global government bond markets sold off again, led by the eurozone and Germany, where the yield on that country’s 10-year benchmark went to highs not seen in more than a year.

In the Middle East, where rates volatility added to geopolitical concerns, many sovereign credits were down sharply. Saudi Arabia’s debt curve was pressured lower by about a point during the session, according to data from a London-based trading desk.

In Latin America, Argentina’s sovereign bonds were volatile, trading down sharply amid a combination of weakness in the Argentine peso and higher U.S. Treasury yields, traders said.

But Argentina rallied off its lows when “the Treasuries market started to consolidate somewhat,” a New-York-based trader said, and also amid what appeared to be “some short covering.”

Argentina’s 7 1/8% century bonds, which priced on June 19 at 90, or a 10% discount to par, fell to as low as 88¼ during the session before moving back up to 89¼ by early afternoon, compared to a close of 90¾ on Wednesday.

“Argentina was really beaten up this morning,” a trader said.

Argentina’s corporate and provisional bonds were also under pressure, but they were not very active. It was mostly the sovereign bonds that were under fire, a trader said.

And Argentina was not the only one: Brazil’s government debt was also volatile, widening out by about 10 to 12 basis points, before pulling back to about three to 7 bps wider, a New York-based trader said.

Brazil was “trading poorly,” with “mostly sellers out there,” a trader said, noting that the trading was “very technical and bond specific.” Mexico was the same as Brazil and also extremely technical, the trader said.

Meanwhile, Venezuela sovereign debt was more resilient although thinly traded. The troubled sovereign moved only about ½ point lower at most and closed down by about ¼ point, a trader said, owing the smaller move to support provided for the oil-producing country by crude oil prices that were higher on the day.

“It closed under pressure too, but was helped by higher oil,” a trader said of Venezuela.

Volatility seemed to take a toll on Latin America’s primary market. There were no new deals heard in Latin America, and a deal from Argentina’s Pampa Energia SA remained unpriced despite expectations that it would price this week.

Given market conditions, it was to be expected, a trader said. “We need things to settle down first.”

Thursday’s turbulence was like what happened in bond markets last week when several central bankers including European Central Bank President Mario Draghi commented on economic health in the eurozone and elsewhere and pointed to potentially more hawkish monetary policy going forward.

But Thursday’s moves were linked specifically to the release of the minutes of the ECB’s June policy meeting, which showed bank members open to dropping from their policy message a long-standing policy to expand or extend the bank’s bond-purchasing program as necessary.

The release of the minutes from the U.S. central bank’s June policy meeting on Wednesday didn’t stir up the same volatility. But on Thursday, the U.S. 10-year Treasury note fell along with the broader bond market, sending its yield to 2.384% earlier Thursday and last to around 2.369%. That stands in contrast to how low the yield on the 10-year had gotten before this change in sentiment. On June 26, it was down to 2.135%.

Not only bonds but stock markets also sold off on Thursday.

In the Middle East, a Cairo meeting with the group of countries that have cut off diplomatic and trade relations with Qatar responded to Qatar’s rejection of its demands as negative and lacking content, but there was still no consensus on further action.

The foreign ministers of Egypt, Saudi Arabia, the United Arab Emirates and Bahrain could make Qatar’s membership in the Gulf Cooperation Council a topic of discussion at their next meeting, but there was neither an agenda nor a meeting established yet. Meanwhile Turkey once again affirmed its support of Qatar.

The whole sovereign curve of Saudi Arabia was down between 0.3 point to almost a point.

Saudi Arabia 2 3/8% notes due 2021 were at 97.55 bid, 97¾ offered late Thursday, with the yield up to 2.99% and 2.94%, compared to 98.34 bid, 98.49 offered on Wednesday, with the yield at 2.79% and 2¾%.

Saudi 3.628% notes due 2027 were down nearly a point to 101.12 bid, 101.37, with a yield of 3.49% and 3.46%, down from 102.05 bid, 102¼ offered with a yield of 3.38% and 3.36% on Wednesday.

The longest dated Saudi note, a 4½% note due 2046, was off about 0.5 point, yielding 4.44% to 4.45%.

© 2015 Prospect News.
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