Emerging market debt trades flat in cautious market; Russia to prepay $15 billion of Paris Club debt

By Reshmi Basu and Paul A. Harris

New York, May 13 - Emerging market debt traded mostly flat to lower as investors were unwilling to take on more risk in an environment of increased volatility in the high-grade credit derivative market.

A sellside called the market cautious with the Brazil bond due 2040 trading little changed for most of the day.

"On the other hand, Mexico is a fair amount wider," said the source.

"The higher quality names in our market are probably suffering a little more than the lower quality names just because they are closer in proximity to the high-grade market," remarked the source.

"The high-grade and high-yield markets really continue to underperform.

"I think the buoyancy of the broader market than our market is masking still a lot of nervousness about what's happening in high-grade and high-yield," said the source.

The indifferent performance of emerging markets was despite a rally in U.S. Treasuries. The yield on the 10-year note stood at 4.12% by the end of the session, improved from Thursday's 4.18%.

The JP Morgan Emerging Markets Bond Index+ fell 0.03%. The Brazil C bond was 0.249 higher at 100.812 bid. The Ecuador bond due 2030 slid ¾ point to 79½ bid. The Venezuela bond due 2027 slipped ¼ point to 98.65 bid.

Russia little changed despite repayment

In other news, Russia will prepay $15 billion of its Paris Club debt. Earlier, Alexander Kudrin, the finance minister, said the buy-back could help the country reduce its foreign debt to 15% of gross domestic product.

Russian bonds were mostly unchanged, since the news had been widely expected, said sources. In trading, the Russian bond due 2030 added 3/8 of a point to 107 3/8 bid.

One emerging market analyst is recommending an overweight in Russia, with some long-term reservations.

"Russia is paying down its external debt, so an external liquidity shock would have very little impact on its ability to meet its external debt commitments," he said.

"A serious external shock that hits commodities prices badly could raise some fears about the fiscal balance and the medium-term political outlook, but in the short-term Russia is one of the EM credits that is least vulnerable to an external shock."

Argentina scores court win

Meanwhile a federal appeals court ruled in favor of Argentina, giving it the green light to swap $7 billion of defaulted bonds for new debt, a move which had been fought by some creditors in court.

The Second Circuit Court of Appeals panel in New York ruled in favor of a lower court decision made by judge Thomas Griesa.

Argentina was due on April 1 to issue $35.3 billion in new bonds in exchange for $62.3 billion in old bonds.

A market source said this was good news for Argentina because the "conclusion of the swap was necessary for talks with the IMF."

He said that he expects Argentina to issue the new bonds as soon as possible.

The challenge by creditors was led by NML Capital Ltd., a hedge fund based in the Cayman Islands.

EM softer on outside pressures

The sellside source said that emerging markets were being pressured from outside pressures, not internal pressures.

"There really isn't anything on a fundamental basis that is pushing our market down within emerging markets. I think everything is coming from outside," remarked the sellside source.

The source also added that the underperformance in the high-grade corporate sector affects the primary market.

"An awful lot of what we do in emerging markets is for investment-grade issuers.

"Those [investment-grade] investors are the same ones that are getting hit by all this volatility right now.

"High-grade new issuances are down substantially. Yields are coming at substantially wider levels.

"You have to worry about the market," the sellside source told Prospect News.

The source added that the emerging market debt has been more resilient because people see it as a more diversified story, especially on the sovereign side.

"You can look at emerging markets and then say it barely moved from all of the stuff that we are talking about in the high-grade market and all the tranches of the different collateralized debt obligations," said the source.

"And we've had good technicals. We've had good flows into the market."

Nonetheless, as those markets have declined, emerging market debt also begins to look more vulnerable, observed the source.

"Emerging markets has really held in throughout all of this. I think it becomes harder for emerging markets to hold on."

© 2015 Prospect News.
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