Morning Commentary: EM bonds weaken with larger markets; Ukraine bonds fall as IMF awaits reforms

By Christine Van Dusen

Atlanta, Feb. 11 – Emerging markets bonds were weak on Thursday morning, with cash spreads widening by 20 basis points and credit default swaps spreads moving out 15 bps on weakness in the larger markets.

“Wider markets are causing more EM pain, but you only have to look at how corporate is outperforming to see we are actually performing quite well,” a trader said. “Flows are still anemic, as investors watch for target credits to cheapen up.”

Though it was a somewhat busy morning session for Pakistan – with the sovereign’s 2025s trading at 98.75 bid, 99.75 offered – overall, on flows, “we are still not seeing lots of paper hit the market,” a trader said. “If anything, I think paper was taken out of the Street.”

Playing a role in all this was Federal Reserve chairman Janet Yellen, who on Wednesday said less-supportive financial conditions in the United States – as well as equity price declines, higher borrowing rates and appreciation of the dollar – could weigh on the outlook for economic activity.

“A rate hike in March is therefore seen as very unlikely although Yellen also reiterated that the Fed would continue to pursue plans of gradual hikes,” a strategist said.

Looking to Latin America, only a handful of names were trading on Thursday morning, “which isn't surprising,” a New York-based trader said.

“Clients are clearly better sellers here in our space, but it’s not thick nor deep in size per inquiry,” he said. “Credit performance seems to be all over the map, but it’s very difficult to gauge right now.”

Ukraine urged to make reforms

Market-watchers were also talking about Ukraine, which was urged to speed up reforms for state-owned companies to fight corruption.

“Yesterday, the International Monetary Fund’s comments over the Ukraine bailout were much tougher than those at the beginning of the week,” according to a report from Schildershoven Finance BV. “The IMF warned that Ukraine’s $17.5 billion bailout might be halted without progress on the reform.”

Ukraine tumbles

Ukraine’s bonds have “tumbled,” a trader said. “While we do not expect the IMF to cut off Ukraine’s lifeline – a four-year $17.5 billion bailout program – such a move would leave the country devastated.”

The president later promised to commit to reforms.

“Sovereign bonds may slightly rebound today, following several days of correction,” the report said.

Africa in focus

Nigeria also received some attention on Thursday, following the conclusion of its roadshow for $1 billion in bonds.

“Nigeria also plans to tap concessional financing from IFIs, including loans from the World Bank and the African Development Bank,” the strategist said. “The funds would mainly be used to plug the budget deficit.”

In other news from Africa, South Africa's president was set to deliver is annual state of the union address as investors awaited “some actual improvements in the economy,” he said.

“The country is still at the edge of a downgrade to junk,” he said.

© 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.