EM spreads improve with U.S. stocks rally; corporates lag sovereigns; Bahrain in the wings

By Rebecca Melvin

New York, March 26 – Emerging markets spreads improved on Monday, with the Latin America and Africa regions outperforming Europe and Asia, after bearing the brunt of widening in recent market turbulence.

Latin America sovereign debt spreads were in by 7 basis points to 428 bps, and Africa was in by 6 bps to 343 bps on the day on the J.P. Morgan EMBI global sovereign bond index, which was in by 4 bps to 323 bps overall, according to a market source.

Europe was in by 3 bps to 242 bps, and Asia was in by only 1 bp to 157 bps.

Europe and Asia spreads were likely to catch up overnight as they had not seen the full effect of the rally in U.S. stock indexes, a New York-based emerging markets strategist said.

The major U.S. stock indexes rebounded on Monday, with buying accelerating into the close, as worries about U.S. trade policy, which pulled the indexes sharply lower on Thursday and Friday, left the Dow Jones industrial average up 669.40 points, or 2.8%, to 24,303.60. The S&P 500 stock index rose 2.7%, and the Nasdaq stock index jumped 3.3%.

Despite the rally, the tone of the market remains uncertain given questions around U.S. trade policy, geopolitics, and interest rates, the market strategist said.

With the return of volatility, it is notable that yields even on shorter dated maturities like the three-year U.S. Treasury has pushed up to 2.4%, making it a reasonable competitor among bonds sought by investment funds.

Argentina was one of the best performers on Monday, tightening by 8 bps to 319 bps, and Ecuador was also a big mover, the strategist said.

South Africa bond spreads improved on the back of confirmation of its investment-grade rating and change of outlook to stable by Moody’s Investors Service on Friday.

Among corporate credits, which tend to lag the sovereign market because of their typically smaller deal sizes, the improvement was by only about 2 bps on average. But further improvement is anticipated.

Brazil’s Itau Unibanco 6.2% notes due 2020 traded actively for a second straight day, ending the New York session around 104¼, after trading as low as 103½ intraday and after trading within the same range on Friday, according to Trace data.

China-based Baidu Inc.’s new 3 7/8% notes due 2023 were a little lower on Monday ending the session around 99.56 after trading as high as 99.79 intraday, which was below Friday’s 99.80 to 99.85 level, which was off issue price at 99.902 on Thursday.

“We needed an event like this today because sovereign spreads are still 40 bps off their Jan. 31 lows. They made it all the way up to 330 bps, and really needed to have a rally here because the spreads were ready to break out to the upside, threatening to reverse their trend,” the strategist said.

Spreads at these levels were first encountered a year ago in March 2017, so spreads are unchanged from a year ago, the strategist noted. But for the year to date, emerging market global bond spreads are wider by 18 bps, as of Friday’s index print. Total return is also negative at 2.6% currently.

“It’s going to be a challenging year,” the strategist said. “For those that purchased the EMBI Global on Dec. 31, when you were buying a yield of 6.65%, you’ve lost 2.6%” the strategist said.

From this point, the strategist anticipates a “reasonable amount” of trading activity to return to the market as portfolio managers come under pressure to come up with decent returns. “It’s going to be a hunt and peck for some of the higher yields to make a meaningful difference in returns.”

Ecuador, El Salvador and Argentina could help make up some ground. And within Africa, Nigeria, Ivory Coast and Angola are mentioned as carrying a fair amount of yield and risk, while in Europe, Ukraine is a good bet, the strategist said.

Bahrain is expected to price seven-year sukuk and 12- and 30-year conventional bonds this week after investor meetings wrap up, and other new deal activity is anticipated early in the week ahead of the upcoming Easter holiday, market sources said on Monday.

Despite a strong January that saw spreads tighten on the back of New Year portfolio adding, an inflow story and general risk-on environment, “the market has bitten back and taken no prisoners” in February and March, a London-based trader said.

© 2015 Prospect News.
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