EM debt softens in quiet market; investors eye trade tensions; PDVSA 2020s better bid

By Rebecca Melvin

New York, July 23 – There was not much activity in emerging markets debt on Monday, with the market was mostly quiet and mixed and a tone that was softer overall, market sources said.

“There are both low and high beta issues that are lower on price with wider spreads,” a New York-based market source said.

There were not any particular drivers for directional views yet, the source said, adding that it is likely that investors are looking for the news catalyst.

Despite that, there were some headlines from the G20 meeting this past weekend that were seen as positive for emerging markets debt, the source said.

The G-20 group finance ministers and central bankers ended their meeting in Buenos Aires on Sunday with little progress made on resolving global trade tensions. U.S. Treasury Secretary Steven Mnuchin said the United States is ready to start talks on trade agreements with China, the European Union and Japan but that these partners must first level the playing field by removing tariffs, non-tariff trade barriers and subsidies.

Specifically, Mnunchin said that U.S. companies should not be forced into joint ventures with Chinese companies to do business in China and that they should not be forced to transfer technology.

The United States remains poised to impose tariffs on all $500 billion worth of goods the United States imports from China each year, Mnunchin said. The United States has already levied tariffs on $34 billion of machinery, and another $16 billion of products are scheduled to come under U.S. tariffs.

But other G-20 members were strong in their voice against U.S. tariffs. French Finance Minister Bruno Le Maire said that the European Union would not hold talks while the U.S. tariffs are in effect and that if the United States followed through with a proposed 25% tariff on imported cars, then Europe would retaliate.

Le Maire said that the European Union is ready to hold talks on changes to the existing multilateral trade system, including the World Trade Organization, but only if reforms are intended to strengthen the system.

In Latin America, Venezuela and Petroleos de Venezuela SA bonds were mostly quiet like the broader market, but there was a bid in the PDVSA 8½% 2020 bonds because of news that the U.S. Treasury Department’s Office of Foreign Asset Control has issued a license that would enable holders of PDVSA’s 2020 bonds to access the bond’s collateral despite an executive order that prohibits U.S. persons from receiving shares from the Venezuelan government.

The 2020 bonds were well bid, a U.S. East Coast-based trader of Venezuela and PDVSA bonds said. “People see the news as a green light to seize Citgo in case of a default. U.S. persons have the procedure clear now, in case there is a default.”

The Venezuela 2020 bonds saw $7.3 million of bonds change hands on Monday, and the price of the bonds was higher at the close of markets at 87. That was better than the 85.8 bid, 86.6 offered level seen earlier.

The sovereign and state-owned oil company have continued to make coupon payments on these notes, while coupons have been missed on many other bonds in these two names.

On Friday the OFAC issued Venezuela General License 5, which authorizes U.S. persons to engage in all transactions related to, the provision of financing for, and other dealings in the PDVSA 2020 8½% bonds that would be prohibited by executive order as of May 21.

The PDVDA 2020 bonds are up from below 80 in February and from about 70 in November 2017.

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