Dollar rally sparks EM debt selloff; Angola prices $3 billion; LatAm holds off on deals

By Rebecca Melvin

New York, May 3 – A strengthening U.S. dollar has sparked renewed selling in EM credit this week, exacerbating a drop in the emerging market sovereign bond index since the end of March, a New York-based analyst said on Thursday.

Total return for the J.P. Morgan emerging market global diversified index of sovereign bonds stands at negative 2.3% for the end of March through Thursday. The return for April alone was negative 1.5%. And for the year to date, the total return for the JPM EMB diversified index is negative 4%.

Meanwhile in primary market action, the Republic of Angola priced $3 billion of notes due 2028 and 2048 on Wednesday.

The $1.75 billion tranche of Angola 8¼% 10-year notes priced at 99.987 to yield 8¼%, or a yield spread of 528.6 basis points over U.S. Treasuries. Pricing was tightened from initial talk in the 8½% area.

And the $1.25 billion of Angola 9 3/8% 30-year notes priced at 99.976 to yield 9 3/8%, or a yield spread of 625.1 bps over Treasuries, with pricing tightened from initial price talk in the 9 5/8% area.

Veszprem, Hungary-based fertilizer producer Nitrogenmuvek Zrt. also guided pricing for its €200 million offering of seven-year notes to yield 7%.

The notes, which are non-callable for three years, were initially talked at 7% to 7¼% yield.

But for the Latin America region, a calendar of new deals remained on pause mode as markets contend with a dollar rally that has seen the greenback gain nearly 4% against a basket of the mostly traded currencies, in the last two weeks.

The dollar is strengthening as the U.S. Federal Reserve sets its sights on rate rises of at least 75 bps this year. As widely expected, the Federal Open Market Committee did not raise rates this week; but the combination of ongoing economic strength and inflation running close to the FOMC’s 2% target portends a full slate of increases this year. And that will pull U.S. rates further away from the pack of developed world rates.

In addition to the strengthening dollar, the market has been hindered this year by trade disputes, geopolitical risk and the equity correction in February.

Russia credit, which was hit by U.S. sanctions imposed against seven Russian oligarchs, 12 of their companies and 17 government officials on April 6, is also down 2.3% since the end of March, in line with the overall index. Meanwhile, Latin America sovereigns outperformed the Central & Emerging Europe Middle East and Africa region as a whole but did worse than Asia.

“It’s unlikely that the U.S. trade dispute with China will escalate in the near term and there is scope for recovery in EM credit if the dollar stabilizes, but if the dollar has a sustained rally, I don’t see good scope for recovery,” the analyst said.

While the fundamentals are solid and commodity prices are strong, which is good for emerging markets, the medium term will depend on dollar momentum, the analyst said.

“This selloff may have some legs. It’s not fundamentally based right now, but that could evolve,” the analyst said.

© 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.