LatAm ‘heavy’ as stocks, Treasuries drop; Akbank launches deal; Venezuela little changed

By Rebecca Melvin

New York, Feb. 20 – Latin America’s debt markets were heavy on Tuesday as the holiday-shortened week in the United States got underway amid a drop in U.S. stocks and Treasuries. Financial markets were closed on Monday due to the Presidents Day holiday.

The long end in Brazil was down 1½ points, and Argentina’s long bond was down 1¼ points on Tuesday, according to a market source. But Costa Rica was resilient, with the Costa Rica 2045 bonds holding in and sporting a spread that stands 15 basis points tighter since Feb. 5, when the curve fell on an unexpected victory by religious fundamentalist candidate Fabricio Alvarado.

Since the first round of that country’s ongoing election runoff, when long-end bonds fell about 3 points, investors have been cheered by a fiscal consolidation plan unveiled by the candidate, a New York-based market source said.

The candidate’s victory was unexpected, but the comfort level has grown, the source explained. “The bonds dropped very significantly, but have gradually recovered, and today they were very resilient.”

The spread on the Costa Rica bonds due 2045 is about unchanged, but it represents a tightening because U.S. Treasuries have widened by 15 bps since Feb. 5.

For the region overall, Latin America closed lower on Tuesday because of the move in rates that was largely influenced by a Treasuries auction, a second New York-based market source said.

A huge driver of what is to come in Latin America is where U.S. rates stabilize and what the shape of the curve is at that point, the market source said. “In the meantime, we should probably trade in a sideways range.”

No new issues were announced for the Latin America region, but issuers should be able to get deals done in this environment, the source said. “Borrowers are likely to take a day-to-day approach to the new issuance window.”

A wait-and-see approach has crept across the emerging markets space after high-beta names were hit in the recent bout of market volatility. Lower beta names like Chile, Peru and Panama were not significantly affected, a source said.

Elsewhere in emerging markets on Tuesday, Akbank TAS announced and launched $400 million of 10-year notes (expected ratings: B1//BB). Pricing was expected to occur at 6.8% yield, which was at the tight end of final guidance in the range of 6.8% to 6.85% and down from initial talk in the high 6% area.

Also on the calendar is a potential new offering of euro-denominated notes from Slovenia. Further details on the new notes were not available as the sovereign undertakes a series of financing transactions including a tender of its outstanding 2022, 2023 and 2024 dollar-denominated notes and an exchange offer of its outstanding 2022 and 2023 dollar securities into a reopening of the 2024 dollar notes.

Venezuela, PDVSA braced

While emerging markets has been susceptible to spikes in Treasuries that have transpired of late, one market that continues to move unto its own is that of Venezuela and Petroleos de Venezuela SA.

Those bonds moved down about 20 or 30 cents on Tuesday leaving the benchmark Venezuela bonds due 2027 relatively unscathed at 28¾ for a mid-price.

There have been no new developments in the Venezuela and PDVSA market in recent sessions, but investors remain braced for a potential default at any time.

There have been no updates from the government and no payment of overdue coupons and investors are still sitting tight, a source said.

The market expects some kind of action from the United States that could include sanctions against Venezuela oil trade, but such moves are seen as unlikely to take place ahead of the upcoming presidential election in Venezuela in April.

President Nicolas Maduro has called this election sooner rather than later, but as of Monday, leaders of the country’s opposition coalition were seen boycotting the election due to what it believes will be election rigging in favor of Maduro and his ruling socialist party.

Colombia is also slated to elect a new president in the first half of 2018, and early polls point to more left leaning candidates being favored. The sovereign has not waded into the international bond market amid budgetary deficits after its ratings downgrade in December.

S&P Global Ratings downgraded Colombia to BBB- from BBB, citing weaker than expected growth and a high level of external debt.

Mexico, Paraguay and Brazil are also scheduled to hold elections this year.

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