Petrobras bonds drop sharply after CEO resigns; EM debt broadly lower; Argentina down

By Rebecca Melvin

New York, June 1 – Petroleo Brasileiro SA’s bonds dropped on Friday after unexpected news that its chief executive officer resigned.

The slide extended a move lower in Petrobras’ bonds over the past few days as Brazilian leaders sought to respond to protests and a national truck drivers’ strike that crippled the country last week and into the weekend.

On Friday, Petrobras’ weakness weighed on the broader emerging markets debt market, a New York-based analyst said.

Petrobras’ 5¾% bond due 2029 printed late in the day at 87.255, which was off the lows seen with an 86 handle during the session but was still better than 2 points down from near 90 on Thursday. The move lower was on heavy volume and on top of a ½ point slip on Thursday and a ½ point slip on Wednesday for the 2029 bonds.

The entire EM debt space was weaker amid a combination of the Petrobras shock and the better-than-expected U.S. jobs report, which sent Treasury bonds lower and U.S. stocks and the dollar higher, the New York-based analyst said.

EM yields widened following Treasury yields.

U.S. non-farm payrolls rose by 223,000 jobs for May, sending the unemployment rate down 0.1% to 3.8%, a multi-decades low. The favorable report boosted expectations that the Federal Reserve will target four rate hikes this year instead of three.

In addition to the Brazilian real, which weakened with the Petrobras news, the Turkish lira also had a setback on Friday, moving back lower to 4.64 lira to the dollar amid speculation that the sovereign may be downgraded by one or more ratings agencies.

Late in the day Moody’s Investors Service published a statement that it is placing Turkey’s Ba2 rating on review for downgrade. The decision was driven by Moody’s expectation that the recent erosion in investor confidence in Turkey will continue if not addressed through credible policy actions following the June elections.

The shift in investor sentiment is a challenge for a country that is deeply dependent on net capital inflows to finance annual gross external borrowing requirements of more than $200 billion, reflecting the large current account deficit and sizable short-term debt and long-term debt maturities, Moody’s said.

Petrobras drops

The resignation of Petrobras’ Pedro Parente sent the Brazilian currency lower and raised fears that Petrobras will now continue to move away from policies that have marked turnaround efforts for much of the past two years.

The resignation comes after a nationwide trucker strike in Brazil protesting high diesel prices. The crippling strike forced the government to lower diesel prices, a step contrary to what Parente had outlined as his objective of aligning prices more closely with international markets.

“But we’ll have to wait for the replacement to see what comes next for Petrobras,” a New York-based EM analyst said.

Brazil’s bonds of 10- to 30-year maturities fell the most or by 2 to 3 points shortly after the resignation news broke at mid-morning.

In addition to the better-than 2-point drop in the 2029 bonds, the Petrobras 7 3/8% notes due 2027 were down nearly 2 points at 99.8; the Petrobras 5.999% notes due 2028 were off 1.5 points at 91.25; and the Petrobras 7¼% notes due 2044 traded at 91.45.

Petrobras’ shorter-dated, 4 3/8% notes due 2023 slipped only about 0.9 on light volume. Only $15 million of the 2023 bonds traded on Friday compared to $99.7 million of the 2029 bonds.

Banco do Brasil SA’s 4¾% bonds due 2024 were up nearly 2 points trading at the 90 mark.

The Brazilian real spiked to a three-year low to 3.76 real to the U.S. dollar, which was up from 3.72 on Thursday and 3.41 in mid-April.

In other news, two of Italy’s anti-establishment parties, the League and the 5 Star Movement, were able to strike a deal to revive a coalition government late on Thursday, which reduced concerns about the euro zone, an issue that had soured the EM debt market on Tuesday.

Argentina bonds lower

Argentina’s trio of issues that priced in January moved lower in trade on Friday.

The Argentina 4 5/8% note due 2023 was down to 91.155 from 92.073 on Thursday; the 5 7/8% notes due 2028 were down to 87.55 from 88.887 on Thursday; and the 6 7/8% notes due 2048 were down 1.5% to 82.566 from 84.137 on Thursday.

Argentina continues to negotiate support from the International Monetary Fund, with market players expecting a deal by mid-June for between $30 billion and $40 billion. The IMF support should allow the sovereign to fund its public funding needs without needing to tap international markets, but it will lead to slightly lower growth ratings in the coming quarters.

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