Bono del Sur tap pulled; emerging markets stronger; Argentina, Ecuador up; Turkey firm despite 'sell'

By Aaron Hochman-Zimmerman

New York, Aug. 18 - Even the Federal Reserve could not help the emerging markets primary.

The pipeline seized up again as Venezuela and Argentina were forced to pull the $1.5 billion local-currency addition to their Bono del Sur, the only new deal seen as having a chance of pricing anytime soon.

But the secondary was stronger as emerging market bonds moved up on Friday after the Federal Reserve stepped in to try to ease investor fears of a credit crunch with a surprise 50 basis point cut in its discount rate - and said that, if need be, it would take other measures.

That unexpected Fed announcement early in the U.S. trading day gave what are perceived to be relatively risky asset classes, such as equities, high yield bonds and emerging markets debt, a badly needed boost. Those markets had been roiled by several days of turmoil sparked by renewed fears that the U.S. subprime mortgage lending industry meltdown would have wider-ranging effects than initially thought.

The volatile bonds of high-beta credits Argentina and Ecuador - which, along with Venezuela, generally move up the most when EM debt is doing well and suffer the biggest plunges when it is not - were the market leaders on Friday.

Among the generally more stable names, Mexico's bonds were seen doing well, as was Brazil's benchmark issue.

In Asian dealings, Philippine bonds were seen a little better, although good economic data produced some selling, and the cost of hedging against a possible default in the bonds via credit default swaps contracts remained well above 200 bps.

Turkey's bonds were seen managing to shrug off a "sell" recommendation by Merrill Lynch & Co.

Even as equity markets globally shot upward - in the United States, the bellwether Dow Jones Industrial Average jumped 233.3 points (1.8%) to close back above the psychologically potent 13,000 mark at 13,079.08, while the S&P 500 and Nasdaq indexes did even better, up 2.5% and 2.2%, respectively - U.S. Treasuries were also better on the day. The yield on the benchmark 10-year issue came in by 2 basis points to 4.67%, while the yield on the 2-year Treasury notes fell by 6 bps to 4.17%.

EM spreads tighten

With emerging sovereign bonds outperforming their U.S. counterparts, spreads between the EM bonds and Treasuries - seen as the key measure of investor risk tolerance or aversion, tightened markedly.

The widely followed EMBI+ index compiled by JP Morgan & Co. pegged the average spread at 236 bps, a 15 bp tightening on the day. Those spreads had widened out on Thursday to 251 bps, their highest level in nearly two years. However, despite Friday's tightening from that zenith, spreads still remain around 30 bps wider than they were a week earlier.

Argentina leads the way

Argentina's bonds were seen having done the best on Friday, rising in line with a surge in that country's Merval stock index, which shot up more than 5% on the day.

"The market [for Argentine bonds] showed a strong rebound after the Fed statement," a buyside analyst said in a research note. "We saw two-way flow" after the Fed announcement; then after that, the market was seen as "stable with quiet activity."

The bonds were also seen having benefited from moves by the country's legislature to make some $1 billion available for debt repurchase.

Argentina's benchmark 8.28% dollar-denominated notes due 2033 were quoted going home at 79.60, up more than 2½ points on the day, with the yield on those bonds falling more than 30 bps to 10.37% late in the trading day. Other Argentine issues did even better, with the average spread between Argentina's external bonds and Treasuries having come in by more than 40 bps on the EMBI+ index to 475 bps.

Among Argentina's inflation-linked bonds, its peso-denominated Discount issue rose to 109, as its yield fell to 8.71% from 8.95% at Thursday's close. The peso bonds were helped by a strengthening in that currency unit; at the close, US$1 bought 3.1559 pesos, versus 3.1575 late Thursday.

The cost of a five-year CDS - which moves inversely with investor confidence in the safety and stability of the underlying bonds - fell by 37.5 bps to 512.5 bps.

Ecuador firmer

Argentina shared the leadership role in Friday's session with Ecuador, whose bonds were seen having tightened, spreadwise, by nearly 50 bps to 722 bps, according to the EMBI+.

Ecuador's benchmark 10% notes due 2030 were quoted late in the day up 2 points on the session at 84.

Both countries' bonds had been seen among the biggest losers on Thursday, when the EM market was taking a beating and the high-betas in particular were seen almost in freefall. The spread between Quito's debt and Treasuries, for instance, at one point ballooned out to a bloated 791 bps.

Besides being buffeted by the same winds that were seen affecting emerging market credits generally, Argentina, Ecuador and the third member of the trio, Venezuela, have also been impacted lately by investor angst over political turmoil in each of those countries. These have included efforts by the respective presidents of Ecuador and Venezuela, Rafael Correa and Hugo Chavez, to increase their authority over the countries' traditionally independent central banks, and controversy in Argentina over the accuracy of government-reported inflation data following several personnel shakeups at the bureau which grinds out those numbers.

Chavez, in particular, this past week introduced a package of what he termed constitutional reforms. The bombastic president said that it was imperative that his government remove "any trace of autonomy" from the Central Bank of Venezuela - and also touted a constitutional change that would allow him to serve as many terms in office as he pleased, rather than being term-limited out.

Brazil bonds better

Outside of the volatile high-beta names, Brazil's benchmark 11% dollar-denominated global bond due 2040 - the most liquid and generally the most widely traded external sovereign paper - rose nearly 1 point on the day, quoted at 130.063 bid, although the bonds trimmed their earlier intra-session gains of nearly 1 1/3 points.

At another desk, the bonds were quoted at 129.80, although this was still up from Thursday's level of 129.25.

The yield on its zero-coupon real-denominated bonds due 2008 meanwhile fell 7 basis points to 11.36%. The locally denominated bonds rose against a backdrop of a rose 3.3% rise in the real to 2.0246 per dollar - the currency's biggest one-day gain since October 2002.

Mexico gets a boost

Mexico's bonds surged amid a general market rally sparked by hopes that the Fed's action to forestall a credit crunch would limit the damage done to the U.S. economy - Mexico's largest trading partner and its key export market.

Mexican debt was also upgraded by Merrill Lynch & Co. to market weight in its portfolio recommendations to investors from underweight previously.

"We are comfortable allocating more exposure to low-yielding Mexican debt," the investment bank said in a research note.

The benchmark 10-year peso-denominated bonds shot up by more than a point, quoted closing at 100.287, with the yield falling more than 15 bps to 7.95%, the biggest one-day drop since last December.

The bonds improved in line with gains in the peso, seen up about 1% on the day, at 11.0905 pesos to the dollar, versus lows of 11.3285 pesos to the dollar during Thursday's trading.

The country's dollar-denominated global bonds due 2017 were steady at 97.813 bid - even though Merrill Lynch recommended that investors buy those bonds.

Turkey up despite Merrill cut

Outside of Latin America, Turkey's bonds - hard hit by renewed investor worry about the country's political situation, as well as the unwinding of carry trades in its lira currency - were seen on the upside Friday.

The country's global bonds due 2034 were quoted up 3/8 point at 104.813 - as it shrugged off advice to investors contained in that same Merrill Lynch report that they sell the bonds.

The report said that although Turkey had outperformed other countries' bonds ever since Merrill upgraded it on April 24 - this despite "substantial political noise" - the party now appears to be over. "We believe that the credit will face significant headwinds in this soured global backdrop," Merrill Lynch warned.

Besides the jittery global market, investors in Turkish bonds also are taking on substantial headline risk, given the unsettled political situation in Ankara.

There is uncertainty over what the presidential candidacy of foreign minister Abdullah Gul might mean, since the nominee of the ruling AK Party is seen in some quarters as an Islamist. Turkey's staunchly secular military warned earlier in the year this it might have to step in to defend the secular state's nature, should Gul be selected as president by the parliament.

Philippines data leads to some selling

In trading earlier in the day during the Asian trading session, Philippine sovereign bonds were seen having bounced part of the way back from the losses they incurred on Thursday, with the benchmark 2031 bonds seen at 105.25, up about ¼ point from Thursday's New York close, though still well down from their levels around 106.5 earlier Thursday in Asia.

Its 2032 bonds were at 94.375 bid, down from a day earlier in Manila at 94.75, but up from Thursday's New York close at 94.25.

The bonds got as good Friday as 94.5, but gains were trimmed when investors seized upon news of an unexpected Philippine budget surplus for July as an opportunity to take money off the table by selling.

The cost of hedging against a default in those bonds using CDS contracts was seen at about 215 bps on the bid side, slightly above the Thursday level of 210/215 bps.

Fed cuts rate, not uncertainty

The Federal Reserve Bank's half-point cut to its discount bank loan rate left the rate at 5¾% and left some investors with the feeling that help may actually be on the way. For others the rate cut demonstrated an admission that the current crisis shows no signs of letting up on its own.

"If we see further monetary action including the main policy rate, then we should then expect a more constructive scenario for emerging markets," an emerging markets analyst said.

Although, "If there will be more jitters for subprime and other credits emerging over the next couple of days or weeks, then growing risk aversion is likely to be continued," the analyst said adding: "I guess that's probable."

An emerging markets strategist predicted a sell off in the coming week after the rebound brought on by the Fed's rate cut.

"We are not quite over the top yet, and that will make the market more volatile ... It might still take another week or months before it settles down," the analyst said.

"People are turning from optimist to pessimist quite frequently," the analyst added.

The strategist also predicted a less liquid near-future.

"Lending will not return to prior levels for many months yet as banks and financial lenders come to grips with what has recently transpired ... That will pressure profit margins and the cost of capital," the strategist said.

"You'd like to see America solve a lot of its problems, it is the U.S. which is spreading uncertainty," the analyst said.

"There yet remains too much information opacity surrounding investor/bank derivatives exposures," the strategist said.

The lesson to take away from the situation is to be diversified and more selective about investment choice and still proceed with caution.

"Emerging markets are not a uniform bunch; you see countries and credits that have strong fundamentals vis-à-vis other countries," the analyst said.

Bono del Sur goes sour

The primary market dealt another losing hand, this time to Venezuela and Argentina.

The two succumbed to market volatility and withdrew the $1.5 billion local-currency add on to their joint venture Bono del Sur.

The bonds would have been the second addition to the Bono del Sur.

The Central Bank of Venezuela was mandated to run the books for the three tranches, each worth $500 billion of the offering nation's local currency.

Venezuela offered 6¼% notes due March 21, 2019 and 5¼% notes due April 6, 2017.

Argentina offered 7% bonds due Oct. 3, 2015.

The three tranches were only intended for local investors and would have traded independently of each other.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.