Emerging market debt underperforms U.S. Treasuries; Argentina down on finance minister departure

By Reshmi Basu and Paul A. Harris

New York, Nov. 28 - Emerging market debt moved lower Monday, even as U.S. Treasuries rallied. Meanwhile Argentinean bonds came under pressure on the departure of the country's finance minister.

In the primary market, Venezuela sold an upsized offering of $3 billion in domestic bonds maturing in 2016 and 2020 (B2/B+/BB-).

The $1.5 billion of 2016 bonds priced at par to yield 5 ¾%. Meanwhile the $1.5 billion portion of 2020 bonds were issued at par to yield 6%.

One market source noted that the new bonds are trading cheap to fair value by 30 basis points.

ABN Amro, Calyon and Deutsche Bank were joint leads for the Regulation S deal.

Barbados also tapped the market. The government sold a $125 million offering of 30-year bonds (Baa2/BBB+) at 98.401 to yield 6¾% via Deutsche Bank.

EM spreads widen

Emerging market debt saw wider spreads Monday as the market was unable to keep pace with a rallying Treasuries market. At late session, the yield on the 10-year Treasury note stood at 4.41% compared to 4.43% on Friday. Just two weeks ago, the yield was piercing the 4.68% mark.

The JP Morgan EMBI+ Index widened by five basis points, said a trader, who added that it may be too much to ask the market to "remain at such historic tights."

Last week, the EMBI+ Index reached its lowest level ever.

"The market is mostly range-bound," he said, adding that Brazil traded in tight ranges during the session.

By the end of the session, the Brazil bond due 2040 had lost 0.10 to 123.60 bid.

The trader added that the market would be focused on Brazil's third quarter GDP report, which will be released on Wednesday. Both Brazil's economic policies and its finance minister Antonio Palocci have come under pressure lately. Other cabinet members have asked for an increase in government spending. Palocci is in favor of lowering spending.

Argentina down on finance minister's exit

During the session, Argentinean bonds took a beating in response to the departure of economy minister Roberto Lavagna. Rumors circulated last week Lavagna would leave his post.

On Monday, the rumors turned out to be true. President Nestor Kirchner asked for Lavagna's resignation. Lavagna is credited with overseeing the country's restructuring of $100 billion in debt and pulling the country out of economic doldrums.

The departure did not come as a surprise, said sources.

But another trader said that there is concern that Lavagna's replacement, Felisa Miceli, president of state-owned Banco de la Nacion, would not be as fiscally disciplined as her predecessor.

The uncertainty pulled down the country's paper. The Argentine par bond due 2038 was off by five points, according to Enrique Alvarez, Latin America debt strategist for think tank IDEAglobal.

"There's a confidence issue out there," he said, adding that there was little known about Miceli.

Volatility ahead

Looking ahead to this week, the trader expects to see volatility ahead as political noise turns up the volume.

Alvarez agreed, but added that the volatility will come from the U.S. Treasury side. This week will see a spate of economic data regarding U.S. growth, employment and inflation.

"We're at 4.41%, which is sort of midway between a bearish range for LatAm, which would be above 4.45% and a bullish range which would be below 4.36%," noted Alvarez.

"While the market remains undecided, we will remain range-bound," he observed, adding that by the end of the week, he believes the market will move one direction or another.

© 2015 Prospect News.
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