Secondary lackluster; Venezuela, PDVSA trade sideways as investors eye potential sanctions

By Rebecca Melvin

New York, Aug. 22 – Trading in emerging market debt was lackluster on Tuesday, leaving spreads mostly narrowly mixed amid low volumes as Treasuries slipped back after several days of strength.

U.S. Treasury 10-year notes were last down 10/32 to yield 2.22%, which was up from 2.18% on Monday. Yields fell to 2.16% on Friday, which was the lowest level since June 27.

In the absence of new paper and low volumes, many regions were trading sideways this week as summer doldrums continued.

Meanwhile, investors were looking ahead to the start of the annual Jackson Hole, Wyo., gathering of central bankers and others on Wednesday. Investors will be watching remarks delivered by ECB president Mario Draghi, but whether he will deliver any new policy message at the Kansas City Federal Reserve’s annual conference was in question.

“Jackson Hole starts tomorrow, but really it feels like nothing much can disturb the tranquility in the EM credit space in mid-August,” MUFG Securities credit analyst Trieu Pham wrote in a note published on Tuesday.

Even Venezuela and PDVSA debt, often separated into a world unto itself, was trading in line and “behaving itself,” a Connecticut-based trader said.

“People are staying put, and prices are behaving and staying in a range,” the trader said of Venezuela.

An outperformer in the curve is Venezuela’s 13 5/8% note due 2018, which was up to around 75 on Tuesday, having traded up from a low of 56 on Aug. 2.

“It has had a beautiful run, and is the only [Venezuela or PDVSA] bond trading above their July 7 levels,” the trader said.

But Argentina was under pressure on the back of the lower Treasuries prices and higher yields, and liquidity was low, a New York-based trader said.

New issuance remained quiet as the seasonally depressed summer period continued. But in Asia, Hyundai Capital Services Inc. priced $900 million of investment-grade senior notes in five- and 10-year tranches. The notes priced to yield 135 basis points over U.S. Treasuries and 155 bps over U.S. Treasuries, respectively. That was tighter than talk for spreads of Treasuries plus 155 bps and 170 bps.

Meanwhile, emerging credit markets seemed to ignore geopolitical tensions with North Korea on Tuesday despite North Korea’s saber rattling in the face of U.S. and South Korean military forces having started military drills that will continue until Aug. 31. North Korean officials said via state media that the drills destabilize the situation and make it possible that North Korea will feel it needs to preempt any U.S. action with an attack of its own. Later, new North Korea-related sanctions were announced by the U.S. Treasury targeting China and Russia individuals and entities for allegedly facilitating Pyongyang’s weapons programs.

China responded by saying it opposes the unilateral sanctions of the United States, which are being taken outside of the U.N. Security Council’s framework and that it will hurt bilateral cooperation.

The U.S.-South Korea maneuvers were said to be similar to last year’s exercises, but they are not as large as those the allies usually conduct in the spring. Pyongang has reacted negatively to the drills in the past and may react strongly if strategic assets such as an aircraft carrier or B-1B bombers are deployed.

Regarding Venezuela, investors are focused on whether additional U.S. sanctions will be imposed on individuals associated with the regime of President Nicolas Maduro or if sanctions will be ramped up to include bans on imports of Venezuelan oil or exports to that country of U.S. refined products.

U.S. Vice President Mike Pence may provide some insight into the Trump administration’s thinking on Wednesday at an address he is making before the Venezuelan community in Miami on Wednesday.

Pence is scheduled to deliver remarks at Our Lady of Guadalupe in Doral, Miami’s Venezuelan enclave.

Pence is also likely to stop by the U.S. Southern Command, whose headquarters are in Doral, though this was not confirmed on Monday, according to an article in the Miami Herald.

On Tuesday, PDVSA’s 2017 bonds, which mature in November, were quoted at 90 bid, 91 offered.

The PDVSA 2022 notes were at 45˝ bid, 46˝ offered; the PDVSA 2035 notes were 36˝ bid, 37˝ offered; and the Venezuela 2022 notes were 44˝ bid, 45˝ offered, a trader said.

The outperforming 2018 bonds have a very high coupon of 12 3/8% and have only one year left until they mature. Those factors are helping pull the bond higher, but another reason is that it is a relatively small $750 million issue and is the smallest bond without a collective action clause.

“This bond is attractive because at only $750 million, it is not difficult to get enough weight to counter super majority to modify some of the nonfinancial conditions,” a trader said.

If the issuer tried to modify non-financial conditions like its jurisdiction under New York law, for example, it would not be too difficult to secure the bond for holdouts, the trader said.

Venezuela’s former attorney general Luisa Ortega fled to Colombia on Friday, seeking protection from the Maduro regime as it cracks down on political rivals. Ortega and her husband say they are being accused of crimes in retaliation for their break with Maduro and their condemnation of his efforts to dissolve the opposition-controlled Congress. They have labeled it an effort to silence rivals and indefinitely postpone elections.

Ortega was fired earlier this month by the country’s new Constituent Assembly, which many in the international community have condemned as a vehicle designed to consolidate power for the Maduro regime. On Friday the 545-member assembly voted unanimously to take over legislative powers from the Congress.

The assembly, which is not recognized by Argentina, Mexico, Peru, Colombia, Panama, the United States, Canada and others, has also voted to bestow lawmaking functions for certain socioeconomic matters and finances as well as preserving security and sovereignty.

© 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.