Credito Real notes rise in early trade; emerging markets debt pauses after two-day rally

By Rebecca Melvin

New York, Feb. 1 – Mexico’s Credito Real SAB de CV Sofom ER’s newly priced 9½% notes traded up in the early going on Friday after the consumer finance provider priced $400 million of the seven-year notes at par, a New York-based market source said.

The Credito Real notes were seen changing hands at 101 3/8.

“It was a very generously priced bond in which the issuer left something on the table for investors,” the market source said.

Back in secondary action, emerging markets debt paused after a two-day rally that began after the U.S. Federal Reserve held rates steady as expected on Wednesday and said it will be patient regarding any further rate tightening.

Spreads stand significantly tighter than they were a month ago, with the JPMorgan emerging markets bond index for sovereign credits showing spread has narrowed to 377.9 basis points as of the market close on Thursday, down from 445 bps at the end of December.

The drop was accompanied by a very good return for the month of January, leaving market players in good position heading into the second month of the year. Total return on sovereign debt in the JPMorgan emerging markets bond global index for January was positive by 4.4%, and the total return for corporate bonds, on what is called the CEMBI index, was up 2.6%, according to a market source.

Most of the week’s spread tightening occurred on Thursday, when sub-Saharan Africa bonds came in by 20 bps, and Latin America came in by 8 bps. “The Ukraine was also in, and Argentina came roaring back,” the source said.

Emerging markets debt, as well as other credit assets, saw a shift occur in the market this week.

Heading into 2019, the outlook was cautious, with analysts recommending conservative portfolios, but “quite quickly, before the end of January, we had the necessary conditions for an EM rally,” a New York-based market source said.

The conditions that spurred the uptrend included the resumption of credit expansion in China and the end of the rates-hike cycle, the source said, noting that it is not only the United States that is taking an easier going policy stance regarding monetary policy but Europe’s central banks also.

“The response by investors was to jettison your conservative stances and immediately get exposure to lower quality and higher-yielding asserts,” the source said.

“The bulk of advice coming out of 2018 was for rising U.S. interest rates, the Chinese government deleveraging the credit stock picture and world economy slowing. The outlook was for rising spreads and even falling prices,” he said. But the situation looks different now.

For the whole week, the spread picture was not quite as rosy as it was for the two-days post Fed. Sub-Saharan Africa spreads were only in by 1 bp and Latin America was in by 4 bps for the week, for example. Nevertheless, many credits were scooped up at the end of the week. “Anything with a high yield that was shunted in the fourth quarter was bought including Indonesia” and others, the source said.

BNP Paribas’ credit analysts upgraded their targets in a note on Thursday, and said “the market will now need to rethink the consensus late-cycle narrative, at least for the coming months.”

Viktor Hjort, BNP’s global head of credit strategy & desk analysts, and Paola Lamedica, BNP’s senior European credit and options strategist, said they are revising their outlook and seeing a longer running credit cycle with credit upside. The fact that policy makers and corporate borrowers are becoming more cautious in response to a weak economy and markets is positive for credit, they said. And support for this includes the dovish central banks, less aggressive corporates and the fact that corporate bonds are cheap, they said.

“Our base case now sees IG cash spreads 25 bps tighter, versus 11 bps tighter before, BB credits outperforming BBBs and cash outperforming CDS,” Hjort and Lamedica wrote. “The bull case is a comprehensive U.S.-China trade deal and the bear case is for recession.”

A third factor affecting the emerging markets sovereign bond outlook is that the benchmark JPMorgan indexes are now including more bonds from the Gulf Cooperation Council countries. Their inclusion lowers the combined IG spread in the index.

Among the GCC additions are the United Arab Emirates, with a sovereign spread of 120 bps; Kuwait, with a sovereign spread at 90 bps; Qatar, with a spread of 140 bps; and Saudi Arabia, with a spread of 170 bps.

“It’s raised the IG rating and brought the sovereign spread to 200,” a source said.

On Thursday when the additions were made, the sovereign spread narrowed by 11 bps on the day to 377.9 bps, with high-grade names in by 2 bps and high-yield in by 29 bps to 622 bps.

The emerging markets primary market picture is a different case, with volumes very light in the first month of the year.

The Middle East and Africa region has so far this year seen a total of $9.1 billion including $7.5 billion of notes priced by Saudi Arabia, and two sukuk deals, one priced by First Abu Dhabi Bank for $850 million and one for Dubai Islamic Bank for $750 million.

The demand from investors is likely to remain strong because of the addition of bonds from five out of six Gulf Cooperation Countries being added to the JPMorgan emerging markets bond indexes.

© 2015 Prospect News.
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