EM credit remains soft as stronger U.S. dollar, higher Treasury yields continue to weigh

By Rebecca Melvin

New York, May 7 – Emerging markets debt was soft and mostly quiet to start the week on Monday, following volatility last week that left the space weaker.

The U.K.’s Early May bank holiday, which closed London’s financial markets, contributed to the quiet tone. But Latin America’s debt markets, which were open and have a number of planned new issues on the calendar held over from previous weeks, were also quiet amid uncertainty regarding the direction markets would take following the latest moves lower.

There isn’t a sense that the Latin America credit market is stable enough for deals to price, a New York-based sellside source said via email.

Secondary market pricing was also weak although there were some names performing well, a second New York-based sellside source said.

“I can’t say that deals cannot price but the tone continues to be softish,” the source said.

A selloff was sparked last week on a combination of higher U.S. interest rates and yields, the strengthening dollar and a stumble for Argentina that led to the sovereign intervening to stave off deterioration of the Argentine peso three times in eight days.

The Argentine peso is still down about 8% in the last two weeks and at new lows against the dollar, while the yield on the Argentina benchmark 10-year notes rose by 12.75% to 40%.

Argentina credit was a centerpiece of portfolio profits last year but investors now worry that the strong dollar makes it more expensive for issuers to fund their debt.

Brazil’s real has also fallen and is down about 4% over the past two weeks in the face of higher U.S. rates and the stronger dollar.

Among names trading actively on Monday, a pair of Brazil’s Petroleo Brasileiro SA bonds were trading mixed to lower.

The Petrobras 8¾% notes due 2026 traded down to 114¾ by the end of Monday’s session after they were seen higher by ¼ to ½ point at 116¼ to 116½ in the early going.

Petrobras’ 5¾% notes due 2029, of which $2 billion priced at the end of January, last traded at 93¾, which was slightly higher on the day and up compared to earlier in the session, when the 2029 notes were at 93.3 to 93.4, levels that were unchanged to slightly weaker on the day, according to Trace data. The 2029 bonds were issued at a reoffered 98.402.

But Chile’s Latam Airlines Group SA saw upgrades by Moody’s Investors Service on Monday based on what the rating agency said were improvements in operating performance, leverage and liquidity in the last two years. The corporate family rating was lifted to Ba3 from B1, or to non-investment grade speculative from highly speculative, and the $500 million of senior notes due 2020 was raised to B1 from B2.

Turkey slips

The sovereign bonds of Turkey have also been hurt in the current market environment and were mostly lower on Monday.

Turkey’s 6 1/8% notes due 2028, of which $2 billion priced two weeks ago in the middle of April, were seen down another fraction of a point at 96.48 at the close on the Luxembourg Stock Exchange.

Turkey’s other 2028 bonds, its 5 1/8% notes, traded down about 0.2% to near 90.

Bonds priced last week by Singapore’s Avation plc were turning in a solid secondary performance at par ¾ bid, 101¼ offered, up ¾ point.

Avation’s 6½% senior notes due May 15, 2021 (B/BB-) came at par in a $300 million offering on May 3.

© 2015 Prospect News.
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