ICBC taps market; Latin American bonds see sellers; liquidity drying up before holidays

By Christine Van Dusen

Atlanta, Dec. 18 – Industrial and Commercial Bank of China Ltd. (London Branch) sold notes on a weaker Friday for emerging markets assets, with Latin American bonds losing steam, as the Bank of Japan’s tweaks to its buying program failed to lift risk markets overall.

“With year-end upon us, I guess liquidity will die away shortly,” a trader said.

China-based ICBC’s new deal totaled $300 million 2¼% three-year notes that priced at 99.847 to yield 2.303% in a Regulation S deal.

In trading, bonds from Turkey were trading fairly flat, another trader said, with long-dated bonds well-bid overall.

“The tone in Turkey is constructive,” he said, noting that the country’s central bank would meet the following week. “I think most expectations are ‘no move,’ although some would like to see a hike following the Fed. But given foreign exchange is stable and the political pressure on the central bank to cut rates, I can’t see any chance of a hike.”

Turkish banks saw two-way flows and solid bids for corporates from retail investors, he said.

The market was also paying close attention to Brazil, which this week was downgraded to junk by Fitch Ratings. The sovereign saw its curve steepen toward record levels by Friday, with activity in the 2017s, 2019s and – to a lesser extent – the 2021s, a New York-based trader said.

“Brazil will not come out of the major indices until the end of this year,” he said. “Hence, I would be cautious the first week of 2016. There's still a big free float of 2017s, 2019s and 2021s out there.”

Brazil under pressure

Most of the pressure was on Brazil’s 2023s and 2025s, the New York trader said.

“The short base in Brazil 2025s is very high, both in terms of bonds borrowed and in the negative rate,” he said. “The short base is smaller than it was a month ago, and it went down a little after the big rally on Monday, but it is still hovering around 75% of market capacity and the rate is at about -2%, with some trades yesterday printing as high as -2.5%.”

On the short end, though, bonds “can be borrowed at a positive rate,” he said.

“Super-steep curves generating huge yield and z-spread pick ups, supportive repo technicals, bad macroeconomic fundamentals and potential supply in the short end all point toward a flattening of the curve,” he said.

Lat-Am sees sellers

Bonds from Latin America saw better selling on Friday, with Brazil-based Petroleo Brasileiro SA and Vale SA among the names dominating inquiries, a New York-based trader said.

Mexico-based Cemex SAB de CV “feels lower, although inquiries and prints are minimal and don't show real direction,” he said.

Brazil's five-year credit default swaps spreads closed Friday at 495 bps from 482 bps while Mexico's moved to 172 bps from 170 bps, another trader said.

“Cash prices are on the quiet side as we approach the holidays,” he said. “Mexico cash prices did outperform and Brazil underperformed, as most onscreen bids were hit.”

Venezuela, PDVSA dip

Venezuela's 2027s traded at 39 from 39.50 and PDVSA's 2017s moved to 51.25 from 52 while Argentina's bonds were mostly unchanged.

“Flows for the day saw mostly better sellers of EM paper with only some small buyers scattered throughout the session,” the trader said. “Markets are feeling jittery as we continue to see commodities and risk assets weaken.

“Going into the illiquid holiday season will only exacerbate the issue of price discovery and an overall illiquid weak trading environment. Hopes are that we can get through the next couple of weeks and start the new year with improved sentiment.”

© 2015 Prospect News.
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