EM credits weaker as U.S.-North Korea tensions mount; Venezuela recoups after sanction news

By Rebecca Melvin

New York, Aug. 9 – Emerging markets regained some ground on Wednesday after early weakness amid worries over an escalation of tensions between the United States and North Korea. Market activity was low, however.

An early bid for U.S. Treasury bonds left emerging markets spreads wider by about 5 to 7 basis points early on but came in to about 3 or 4 bps wider by the end of the day, a New York-based trader said.

Turkey and South Africa were each about 5 bps wider in cash bonds and credit default swaps, Andrew MacFarlane, a credit strategist for BNP Paribas told Prospect News, “so it feels like a generally weaker day, but also perhaps some profit-taking. Lack of liquidity is definitely not helping things.”

A second source concurred that negative political headlines resulted in some profit taking.

Heated words between the United States and North Korea left investors jittery. In response to U.S. President Donald Trump’s warning that North Korea desist in making threats against the United States or face “fire and fury,” North Korea said late Tuesday that it is “carefully examining” a plan of attack on Guam, a U.S. territory in the western Pacific with a U.S. air force base and with military and civilians totaling more than 160,000 people.

U.S. Secretary of State Rex Tillerson, traveling in Asia, followed up on Trump’s “fire and fury” statement by saying the president was only using words that North Korea’s leader Kim Jong Un would understand and that an imminent attack was unlikely so Americans should continue to sleep well at night.

South Africa was also giving back some of its gains it notched earlier in the week after president Jacob Zuma survived the National Assembly’s no confidence vote.

In Latin America, markets were also generally weaker, but Cerro del Aguila SA priced $650 million of 10-year senior notes at a yield that was tight compared to initial talk and that edged up after it was released for secondary market trading.

The new Cerro bonds priced with a 4 1/8% coupon at a reoffer price of 99.87 for a yield of Treasuries plus 190 bps. In trade, they moved up to just over par bid, a New York-based trader said.

Back in established issues, other yield names such as Corporacion Nacional del Cobre de Chile moved wider with other investment-grade names, a New York-based trader said.

Codelco priced $2.75 billion of senior notes on July 25, including $1.5 billion of 3 5/8% notes due 2027 and $1.25 billion of 4½% notes due 2047

“Today there was weakness in IG and HY, and that affected spread-stuff like Codelco and other names,” a trader said.

Pressure in the investment-grade market led to some real money guys letting go of paper including Codelco, which is wider on the day, the trader said.

Venezuela and Petroleos de Venezuela SA were trading weaker for a second straight day amid rumors that the United States was about to impose more sanctions against the country following the establishment of a super ruling political body that was stacked with people loyal to president Nicolas Maduro.

Many nations, including neighbors Brazil, Argentina, Chile, Peru and Colombia, have said they will not recognize the political body, which undermines democratic institutions, these names said.

The United States announced Wednesday that eight more individuals have been sanctioned in Venezuela, with all eight being accused of undermining democratic institutions.

The sanctions freeze those individuals’ U.S. assets, forbids them to travel to the United States and makes it illegal for U.S. persons to have dealings with them.

The bonds of Venezuela and PSVSA improved a bit after the sanctions were announced, because they stopped short of economic sanctions such as banning imports to the United States of Venezuelan oil, which investors view as tantamount to debt default since it would leave Venezuela without any income to speak of.

Economic sanctions are an option that is still on the table, U.S. officials, say, and Sen. Marco Rubio of Florida said that he supports such actions at this point.

Wednesday’s individual sanctions follows on the heels of sanctions against Maduro himself last week and against 13 other individuals associated with Maduro on July 26.

Investors had been waiting for the sanctions, to see what kinds of sanctions are going to be implemented.

PDVSA’s 5½% notes due 2037 were seen lower at 31 5/8 bid, 32 1/8 offered at the close, compared to about 33 on Tuesday.

The near-dated PDVSA notes due later this year were at 85 bid, 86 offered. And the PDVSA’s notes due 2026 were seen 31¾ bid, 32 offered, according to a trader, who added that the pricing was with accrued interest.

The Venezuela 2031 notes were at 44 bid, 45 offered.

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