Wider spreads for Lat-Am; South Africa faces uncertainty; Pakistan, Saudi Arabia seek issuance

By Christine Van Dusen

Atlanta, Aug. 25 – Latin American bonds moved wider on Thursday as emerging markets investors focused on the upcoming speech from Federal Reserve Chair Janet Yellen and the continuing political turmoil in South Africa.

“Markets seem to be magnetized by Yellen’s keynote speech at Jackson Hole tomorrow, with one side arguing that the comments could become a game-changer while the other side dismisses the case that she will give any direction,” a London-based analyst said.

As a result, trading activity was limited on Thursday.

“The market activity remains low, with sovereign EM bonds’ benchmark showing a slight decline,” according to a report from Schildershoven Finance BV. “Risk appetite may be under pressure ahead of the upcoming Yellen’s speech on Friday.”

Meanwhile, South Africa faced uncertainty amid a police investigation into a rogue unit inside the South African Revenue Services. Though President Jacob Zuma said he supports Prime Minister Pravin Gordhan, there remains the possibility that Gordhan could be removed.

“While it had become relatively calm in the spat between a special unit investigating a rogue unit in the South African Revenue Services and current Finance Minister Gordhan since earlier this year, this week saw a dramatic escalation of the situation,” the analyst said. “With markets having become very complacent in the current low rates environment, there is certainly an increased risk of a sharp sell-off should Gordhan be removed in the situation.”

In deal-related news, Pakistan is looking to issue between $500 million and $1.5 billion of Islamic bonds, and Saudi Arabia is expected to issue dollar-denominated notes as soon as October.

Goldman Sachs and Deutsche Bank are bookrunners for the latter deal.

South Africa bonds could widen

Taking another look at South Africa, bonds could widen if Zuma drops Gordhan, given that when the former finance minister, Nhlanhla Nene, was fired in 2015, South Africa’s 5 7/8% notes due in 2025 widened by 60 basis points and five-year credit default swaps spreads were off by about 50 bps, the analyst said.

Gordhan has been credited with the sovereign’s recent ratings affirmations.

“Removal would therefore be very detrimental for investors’ confidence in South Africa, who are already concerned about a potential loosening in fiscal policy after the incumbent ANC party lost several major urban areas to the opposition,” he said.

Credit from South Africa has already started to price in the risk of Gordhan leaving, the analyst said, with CDS trading Thursday morning at 247 bps, wider by 20 bps since Monday.

Lat-Am moves lower

Looking to Latin America, credit moved wider and lower on the day, with Brazil’s five-year credit default swaps spreads finishing at 262 bps from 261 bps, a New York-based trader said.

This came as Brazil President Dilma Rousseff’s impeachment trial began.

Mexico’s CDS moved out to 142 bps from 139 bps, he said.

“Cash prices move lower by a ½ point to 1½ points as the market continues to square up ahead of Jackson Hole tomorrow,” he said. “Lat-Am high yield outperforms low-beta on the day as levels are a bit lower to unchanged.”

PDVSA’s 2017s closed unchanged at 75, while Venezuela’s 2027s were down at 49 from 49.50.

Argentina’s Bonar 2024s ticked up to 117.30 from 117.125, and the 2026s inched down to 110.80 from 111.

“Flows did see better sellers today,” he said.

Turkish bonds open stronger

In Turkey, bonds opened stronger by about 1 bp to 2 bps, a trader said.

“Cash curve well-bid,” a trader said. “Bull steepening.”

Trading of Asian bonds, meanwhile, was mixed, according to report from Schildershoven Finance BV.

Ten-year bonds from Malaysia moved higher by 12 bps, while Indonesia and China moved “marginally lower,” the report said.

“Overall, indications of a substantial risk appetite deterioration in EM Asia are appearing,” the report said.

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