Petrobras struggles under weight of scandal; Greece works on debt deal; Asian bonds outperform

By Christine Van Dusen

Atlanta, Aug. 6 – Bonds from Brazilian corporates, particularly those tied to scandal-ridden Petroleo Brasileiro SA, took a beating on Thursday while other emerging markets assets were mixed as commodities slipped and rate volatility increased.

Also contributing to the more-volatile picture was the continuing economic turmoil in Greece, where bond yields declined while the sovereign worked toward yet another bailout package. Talks moved ahead, but a recent remark from a German official – suggesting Greece wouldn’t be able to reach a debt deal by Aug. 20 – caused some concern. On Thursday the European Commission said the talks were progressing in a “satisfactory” way.

“Some selling in the long end of curves,” a London-based trader said. “Bunds are widening and steepening aggressively.”

Bonds from Brazil-based Petrobras widened as much as 50 basis points on Thursday morning after two former executives from OAS were sentenced for corruption related to Petrobras.

Not even the stabilization of iron ore prices could help matters. Sellers of Petrobras bonds outpaced buyers, a New York-based trader said, while Brazil-based Vale SA was quiet.

Other high-grade and high-yield names from Brazil were “a complete mess,” he said, moving markedly lower.

Odebrecht SA saw almost no bids, he said, while bonds from companies like Braskem SA moved lower.

The new issue of 8 7/8% notes due 2022 that Latin America-focused Sagicor Financial Corp. priced Tuesday at 98.727 to yield 9 1/8% was spotted at about 102 amid fewer inquiries on Thursday morning after trading at par on Wednesday.

Risk aversion rises

Low-beta bonds from Latin America moved wider into the close on Thursday as weakness in commodities persisted and investors shunned risk, another New York trader said.

“Brazil takes the brunt of the selling pressure on the day, as local political issues – in combination with overall risk aversion – had [five-year credit default swaps spreads] moving out to 332 bps from 304 bps,” he said. “Mexico’s five-year CDS widens to 137 bps from 137 bps.”

Bonds from Argentina were mostly unchanged while Venezuela moved lower, he said, with PDVSA’s 2017s closing at 64½ from 66 and the sovereign’s 2027s moving to 39 from 40.

“Flows picked up with increased volatility,” he said. “All eyes on [non-farm payrolls] tomorrow.”

Turkey weakens

Sovereign bonds from Turkey were weak on Thursday, with credit default swaps spreads better-bid on Thursday morning, another trader said.

“Turkish banks continue to print resilient numbers given the tougher economic conditions –another excuse for why they are trading tight versus the sovereign, as we continue to see a lack of any meaningful bid-hitting to push spreads wider in that space,” he said.

Asia stays firm

Bonds from Asia, meanwhile, started the session with a firm tone and gained momentum throughout the morning, another trader said.

High-grade cash bonds closed the Asian session 1 bp to 4 bps tighter, with recent underperformers showing promise, he said.

“Liquidity was thin, but recent issues and the China oil space were in focus, with real-money demand and accounts short-covering,” he said.

Minmetals, Icici trade up

The recent issue of 4¾% notes due in 10 years that China Minmetals Corp. priced at 99.858 to yield 4.768%, or Treasuries plus 245 bps, traded Thursday morning at 256 bps, then closed at 257 bps bid, 254 bps offered.

Deutsche Bank, HSBC, JPMorgan, ICBC and Citigroup were the bookrunners for the Regulation S deal.

“Korea firmed up, with the sector unchanged to 2 bps tighter,” a trader said. “India was broadly unchanged, with focus on the new Icici Bank Ltd.”

Icici’s new issue of 3 1/8% notes due in 2020 priced at Treasuries plus 160 bps via HSBC, Barclays, JPMorgan, BofA Merrill Lynch and Standard Chartered in a Regulation S deal.

“The bond traded up at 154 bps at the break and was better-offered,” he said. “Had lukewarm demand in the secondary while we saw mostly flippers. Closed at 158 bps bid, 155 bps offered.”

Asia remains steady

Trading of Asian bonds remained “very steady” throughout Thursday’s session, with lightening flows and buyers of Chinese bonds, a trader said at the close.

“Sovereigns and autos are still fairly sluggish,” he said.

Ukraine bonds suffer

In other trading on Thursday, bonds from Ukraine have weakened so far this week after bondholders criticized the sovereign’s latest restructuring offer, said Fyodor Bagnenko, a fixed-income trader with Dragon Capital.

“Not much actual selling, but rather bids pulling back lower,” he said. “Quasi-sovereigns closed lower for the first time in a while, in modest profit-taking.”

The country’s finance minister postponed an Aug. 5 meeting with creditors until Aug. 10 or 11 to give bondholders a chance to put together a better proposal for restructuring the country’s debt, according to a report from Concorde Capital Research.

If the two parties can’t come to an agreement, Ukraine is expected to introduce a moratorium on servicing its eurobonds.

“We do not expect the creditors’ proposal will significantly improve,” the report said. “In particular, it is difficult to believe that bondholders would accept a much greater haircut on Ukraine’s debt, as compared to what they already offered.”

YPF to issue dollar notes

In deal-related news, Argentina’s Yacimientos Petroliferos Fiscales SA received approval from its board of directors to issue up to $400 million of bonds as part of the company’s $8 billion global medium term notes program, according to a company filing with the Securities and Exchange Commission.

Other details were not immediately available on Thursday.

YPF is a petroleum and natural gas company based in Buenos Aires.

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