Morning Commentary: EM debt drags in light, pre-holiday volume; Costa Rica downgraded

By Rebecca Melvin

New York, Dec. 24 – The emerging markets debt market dragged in light, pre-holiday volume on Monday.

Many trading desks in London and New York have been seeing reduced staff starting from last week ahead of the Christmas holiday on Tuesday.

An iShares JPMorgan ETF, based on exposure to emerging market dollar-denominated sovereign bonds, was down another 0.05 point to 102.94 on Monday, which was only about 0.75 point off its 52-week low.

S&P Global Ratings downgraded Costa Rica to B+ from BB-, with a negative outlook, with the rating agency citing high debts and external risks.

“A high debt burden, poor debt management, a rising share of government debt denominated in foreign currency and a persistently high level of dollarization in the financial sector highlight Costa Rica’s external vulnerabilities,” S&P said in a report.

Costa Rica’s 7.158% notes due 2045 traded on the Luxembourg exchange on Monday at 86.86, which was up 0.06 point on the day, following a 1% gain on Friday when it traded last at 86.80, and the market closed at 86.95 bid, 87.13 offered.

Costa Rica had been listed as overweight by at least one strategist recently, based on the country’s solid footing in the tourism industry and what was considered a well-run government.

Oil credits were in focus in Monday’s quiet Christmas Eve session as global oil prices continued to slide. West Texas Intermediate Crude for February 2019 delivery was down 2.13%, or 97 cents, at $44.62 early Monday, and Petroleos Mexicanos SAB de CV was churning in light volume.

The Pemex 6½% bonds due 2027 were last at 95.82, having also traded as low as 93.75 and as high as 97.54 on Monday, according to Trace data.

The Pemex 6¾% notes due 2047 were last at 80.6. That trade, one of only a couple recorded on Trace on Monday, was down from 82 to 83 on Friday.

The yield of the 10-year Treasury had bounced off morning lows but was still well in the red at 2.769%. U.S. stocks sold off again, although they were last off their lows. The Dow Jones industrial average was down 450 points at one point early Monday but had recovered to down 223 points, or 1%. It was last down 395.11 points, or 1.76%, at 22,050.26.

In an effort to calm the markets, U.S. Treasury secretary Steven Mnuchin Tweeted on Sunday that he had spoken individually with the chief executives of six large U.S. banks to ensure they had sufficient lending capacity. The banks confirmed they had liquidity available with no clearance or margin issues, Mnuchin said.

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