Russia, Ukraine crisis ramps up; EM remains bullish; Lat-Am tightens; Poland plans panda bonds

By Christine Van Dusen

Atlanta, Aug. 12 – Tensions between Russia and Ukraine weighed on emerging markets assets on Friday, but Latin American bonds still managed to finish the day with slightly tighter spreads, buoyed by a rally in U.S. Treasuries.

“Markets remain in a very bullish mood, as the three main U.S. stock indices all closed at record levels since 1999,” a London-based analyst said. “This was little dented by weaker-than-expected data from China. Oil prices have, however, leaped as Saudi Arabia’s energy minister has raised the hopes of price stabilization measures.”

Also impacting the mood was the news that Brazil-based Petroleo Brasileiro SA’s earnings declined. That led Brazil sovereigns to outperform by a wide margin on Friday, a New York-based trader said.

“Flows are two-way, for the most part, as this move to the upside has been gappy,” he said.

Russia and Ukraine were in the news on Friday amid renewed geopolitical tensions, as Russia reportedly sent missiles into Crimea.

This “may scare some investors off the markets, which will cause some correction,” according to a report from Schildershoven Finance BV. “We can’t predict how deep the sales could be, as it will depend on the conflict development.”

Looking to Turkey, banks opened firmly on Friday, a London-based trader said, after Moody’s Investors Service did not downgrade the sovereign’s rating.

“Replacing paper is becoming increasingly difficult as offers are thin on the ground in seniors and almost non-existent in subs,” he said.

Corporates saw one-way flows, he said.

“The sovereign curve is slightly quieter, but then it’s a Friday in August, the sun is out, so expect nothing less,” he said.

Some tightening for Lat-Am

Taking another look at Latin America, credit finished slightly tighter to unchanged on Friday, a New York-based trader said.

Brazil’s five-year credit default swaps spreads ended at 258 bps from 259 bps after trading as tight as 257 bps, he said, while Mexico’s were unchanged at 136 bps. An index of emerging markets assets was down significantly, but mostly because Russia spreads widened by quite a bit.

“Cash prices continue the relentless pursuit higher, as poor U.S. economic data gives way to a Treasury rally that further validated current yields,” he said. “Brazil cash continues to outperform, with long-end bonds up by another 1 point to 1.25 points today.”

High-yielders mixed

High-yield names from the region finished mixed, the trader said.

PDVSA’s 2017s closed at 72.50 from 72.60, Venezuela’s 2027 were unchanged at 46.65, and Argentina’s Bonar 2024s moved to 118 from 117.75. The latter sovereign’s 2026s closed at 111.75 from 111, he said.

“Flows continue to be dominated by better buyers of long-dated bonds,” he said. “With global fixed income continuing to rally, the reach-for-carry trade has yield-starved investors banging on the doorstep in the Latin American credit realm.”

Meanwhile, bonds from the Middle East and North Africa were tighter on Friday, with African sovereign bonds outperforming, a London-based trader said.

Egypt reaches agreement

Egypt received some attention on Friday, after the sovereign reached an agreement with the International Monetary Fund for a three-year fund facility program totaling $12 billion.

“The government’s plan will bring down general government debt” through revenue increases, the analyst said. “Structural reforms will be taken to increase investments and strengthen the role of the private sector.”

The funding “is a large puzzle piece of the $21 billion the Arab Republic is seeking to fill its funding gap for the next three years,” he said. “Officials also stated that an agreement with the IMF could pave the way for a new eurobond issuance, with yields on the Egypt 5 7/8% 2025s having come down to 6.5% from above 8% in mid-June.”

This, plus the favorable market backdrop, “should continue to be supportive for Egypt bonds, although new supply could cheapen up the curve,” he said.

Dhanlaxmi misses coupon

Some investors were eyeing India’s Dhanlaxmi Bank Ltd. on Friday after the Kerala-based lender failed to pay a coupon on a surbordinated debt instrument in July.

This failure “highlights the increased risk to bank capital investors from the mounting asset-quality and capital-adequacy pressures on India’s banking sector,” according to a report from Fitch Ratings.

“This is the first time investors in India have had to forgo interest on a bank capital instrument,” the report said. “We view this as a positive development for a system with a high expectation of support for banks, and where moral hazard has developed around the assumption that support could be extended to regulatory capital instruments.”

Poland picks banks

Poland has mandated Bank of China and HSBC as joint lead underwriters for an issue of renminbi-denominated bonds, according to an announcement from the sovereign.

“Other banks may also be invited into the syndicate during the issuance process,” the announcement said. “The transaction will be launched in the near future, subject to market conditions.”

Other details were not immediately available on Friday.

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