Asian bonds can’t hold early gains; Turkey bucks trend; Middle East notes move wider

By Christine Van Dusen

Atlanta, Aug. 26 – Asian assets on Wednesday morning got an early boost from a rate cut from the People’s Bank of China, but the tightening did not last, and most names “lost some of the momentum into the close,” a London-based trader said.

“The macro picture remains dark,” he said during the session.

But some other emerging markets assets did manage to trade fairly well on Wednesday, despite the holiday in the United Kingdom. Turkey was a standout, with the torrent of selling seeming to slow.

“The risks were well-posted from the outset, leaving positioning cleaner,” the trader said. “Bank paper and corporates feel a bit better-offered in places, as clients are using what little liquidity there is to take some risk off. Subordinate debt remains under pressure and continues to cheapen versus the Turkey complex.”

As the morning went on, sovereign bonds from Turkey got a lift, with the belly of the curve outperforming, another trader said. The 2026 notes tightened by 4 basis points and the 2045s by 2 bps.

From Ukraine, bonds so far this week have moved very little as investors have “digested the implications of a potential 20% haircut for valuations – a tall task in itself, given no information about other deal parameters,” said Fyodor Bagnenko, a fixed-income trader with Dragon Capital. “Current valuation views are quite divergent.”

Quasi-sovereigns and corporates have been slightly better-bid, he said.

Taking a closer look at Asia, bonds from Indonesia and Philippines moved lower during their afternoon session, another trader said.

Bank of China’s 2025s were initially lifted on Wednesday, after the rate cut, but lost steam, he said.

Buyers were seen for 2016 paper from Korea and India, he said.

Middle Eastern assets widen

So far this month, numerous bonds from the Middle East have seen their spreads move significantly wider, a London-based trader said.

Saudi Electricity Co.’s spreads have moved out 15 bps to 20 bps while International Petroleum Investment Co.’s spreads have widened 20 bps to 30 bps.

“The Qatar sovereign is 15 bps to 25 bps wider,” he said. “These are decent moves for these credits, given their spread history over the year.”

Bahrain has also suffered as oil prices have dropped, he said.

“In an illiquid and falling market, the moves get exaggerated significantly,” he said. “All told, summer, oil prices, dealer apathy and horrible liquidity have seen curves steepen, spreads widen and left many licking their wounds.”

Corporate Lat-Am in focus

Trading of corporate bonds from Latin America was “quite timid” after the previous day’s sell-off, a New York-based trader said.

Brazil-based Petroleo Brasileiro SA and Vale SA moved about 5 bps wider amid mixed flows for the former and little activity for the latter.

“Petrobras has been pushed wider, mostly by dealers who are offering very aggressively, particularly on the longer issues,” he said. “Liquidity remains very thin and mostly credit-driven.”

High-grade petrochemical companies from Mexico have seen bids pulled back, he said, while inquiries for Cemex SAB de CV were two-way for most of the week.

High-grade names from Chile, meanwhile, were quiet but firm, he said.

Some tightening for sovereigns

Latin American sovereign spreads managed to tighten on the day as risk sentiment began to improve, another New York trader said.

Five-year credit default swaps spreads for Brazil closed at 350 bps from 355 bps while Mexico’s finished Wednesday at 153.50 bps from 160 bps.

“Cash prices do get hit as a precipitous selloff in Treasuries has the market scrambling to adjust levels lower,” he said. “Long-end cash prices take the brunt of the selling pressure.”

Venezuela’s 2027s closed Wednesday at 36½ from 35¾, and PDVSA’s 2017s ended at 65.20 from 64¾.

Pemex on review

In other news from Latin America, Mexico-based Pemex was put on review for a downgrade from Moody’s Investors Service.

The current ratings from Standard & Poor’s and Fitch Ratings are two notches higher, so the Moody’s news is unlikely to have a significant impact on spreads, a New York-based trader said.

“There is no risk of the credit getting out of the main indices,” he said. “However, the little action we have seen so far this morning has been selling of Pemex bonds.”

In other news, the continuing depreciation of the currency from Brazil is expected to hurt sentiment and widen spreads, another trader said.

“A very bad close last night,” he said. “This is territory not seen since 2002.”

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