Markets sink on news of radiation risk in Japan; EM investors, issuers stay on sidelines

By Christine Van Dusen

Atlanta, March 15 - With the possibility of a meltdown at Japan's earthquake-hit Fukushima Daiichi nuclear plant, markets went into a freefall on Tuesday, spooking emerging markets investors and shutting off the spigot for new deals.

"We're all just watching to see what's happening in the broader world," a New York-based market source said.

Most bonds opened cautiously on Tuesday, and spreads began the day between 10 basis points and 20 bps wider.

"You can't have one of the world's largest stock markets dropping 10% in a day and not expect some global contagion," a London-based trader said.

Some of the day's losses were recouped after optimistic comments from the Federal Reserve, which voted to continue purchasing government bonds and keep short-term interest rates close to zero. The Dow Jones Industrial Average, which had been down about 200 points during the day, ended the session down by 137.74 points, or 1.15%.

"Prices got a little stronger," the New York-based source said. "But everyone is still in wait-and-see mode."

Investors sell paper

Investors started out on Tuesday doing very limited selling, but that changed as the day continued, a market source said.

"People are voting with their feet and dumping paper," he said. "There is no discrimination, aside from a small penchant for selling recent additions to the portfolio."

A little bit of activity was seen in Argentina, particularly the sovereign's discount bonds, which were down by ¾ of a point to 841/4.

"But there's not much happening, really," the New York-based market source said.

Some market-watchers were wondering whether the repricing seen across global markets was a bit over the top.

"That's most likely the case," another London-based market source said. "But when there is a real risk of serious nuclear contamination 150 miles from the world's largest metropolitan area, fear understandably overtakes greed."

EM investing takes courage

Though the JPMorgan Emerging Markets Bond Index Plus spread widened Tuesday 15 bps to Treasuries plus 279 bps - the widest in six months - the fact that it hadn't widened even further was noteworthy.

"In this context, that really is an amazing performance," the London-based trader said.

That makes EM assets a good buy, the trader said.

"But with Libya, Bahrain and the euro zone problems not going away either, you have to have courage," he said. "It takes a punter, but there is some value out there. Clearly many have had to jump ship, but there are good, solid names being severely beaten up."

Still, liquidity remains thin, another market source said. "So the market is vulnerable."

Russian names active

In trading on Tuesday, Russia's 2030 bonds were active, seen at 116, about 15 bps wider. And the country's quasi-sovereigns, such as Gazprom, saw lots of selling.

Ukraine's Oschadbank's 2016 bonds were seen at 100.10, about 20 bps wider, while Turkey was quiet and just 10 bps wider.

"Turkey is managing to post a rare budget surplus, but the bonds still trade heavy, although volumes are light," the trader said.

"And Belarus was a laggard as fallout from Fitch's comments yesterday hurt sentiment further," he said, referring to the rating agency's decision to revise its outlook on two state-owned insurers.

Another market source called the sovereign the day's star underperformer.

"That sent the 2018 notes down 3 points, or 130 bps wider this week," he said.

Bahrain trades down

Also on Tuesday, the Middle East saw moderate trading activity.

The sovereign that got the most attention was Bahrain, where the king declared a three-month state of emergency in an effort to tamp down on anti-government protests. In response, Bahrain Mumtalakat Holding was seen down at 94 and the sovereign's 2020 bonds were trading down at 92.

As of mid-afternoon in New York, Bahrain was nearly flat to Egypt's 2020 dollar notes, unchanged at 92.25 bid, 93 offered. But by the end of the day, on the news of a rate cut, Bahrain's 2020s were trading at 91.

"Still, there remains a degree of order in this market, and certainly part of me is impressed at how it is trading given the events we've been through not only during the past week, but in the past two months in the Middle East and North Africa," the London trader said.

IPIC wider

Meanwhile, Abu Dhabi-based oil investment entity International Petroleum Investment Co.'s curve "has been 15 bps wider," a market source said. "They remain, spread-wise, under pressure. But at least cash price-wise they are trying to hold in."

The company's 2021 notes were seen trading at a cash price of 98 before closing on Tuesday at 97.62 bid, 97.87 offered.

"There's basically been one-way traffic with small Street buying in the morning that eventually faded late in the day with clients throwing in the towel on the name," the London trader said.

Dubai, on the other hand, "remains solid as a rock, only 5 bps wider," he said, "although Dubai Water and Electricity Authority's prices are thin and 20 bps to 25 bps wider."

Primary market quiet

Emerging markets issuers stayed out of the primary market on Tuesday.

"There's no new issuance. Who knows what you could price right now?" the New York-based market source said. "But that could improve if Japan can hold itself together. Obviously that will change in the event of a meltdown."

One issuer who could come to market in the event that the picture improves is Venezuela's state-owned oil company Petroleos de Venezuela SA (PDVSA).

The serial issuer was the subject of a Barclays Capital report on Tuesday. PDVSA's 2017 and 2022 bonds both "remain the cheapest bonds on the curves," the report said. "However, given the technicals - more supply in the longer part of the curve and amortization in the shorter part - we still favor the short-end 2014s and 2015s."

PDVSA in focus

The New York-law 2014s are now trading at about 70 with a 4.9% coupon while the local-law 2017s are trading at the same level with an 8½% coupon.

"We would expect at least a 50 bps to 100 bps local-law premium based on historical data," Barclays said.

"Even though, in theory, a long position in the 2017s and 2022s might result in a higher total return over the long term, in practice, given the supply risk, the strategy could be disappointing," the report said. "For now and for this reason, we still recommend the short part of the curve - 2014s and 2015s."

Since the tensions in the Middle East sent oil prices soaring, PDVSA's bond spreads have tightened considerably. "The bonds have outperformed Venezuelan sovereign debt, and their volatility has decreased. This is not a surprise, because investors were lightly positioned, especially offshore, and valuations were and still are among the most attractive in the emerging markets bond sector."

© 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.