EM debt strengthens with higher oil, rates; Petrobras bonds higher; primary calendar expected to build

By Rebecca Melvin

New York, Jan. 4 – Emerging markets debt strengthened after much better-than-expected U.S. jobs data caused investors to turn sellers of U.S. Treasuries on Friday, which marked the end of a volatile, holiday-shortened week.

Higher crude oil prices were also supportive of the EM debt market.

“Very solid...spreads performing nicely,” a trader of Middle East and Africa credits said.

U.S. nonfarm payrolls for December rose by 312,000, handily topping estimates in the 170,000-plus range, the Labor Department reported on Friday.

Average hourly earnings rose 3.2% from a year earlier, which was also more than expected, and the unemployment rate ticked up to 3.9% from 3.7% as labor-force participation jumped.

Treasuries were lower sending yields back up with the yield on the benchmark 10-year Treasury note moving up from a low mark of 2.551% notched on Wednesday.

Higher oil prices took West Texas intermediate crude for front month delivery up to $48.31, a gain of $1.22, or 2.6%, on the day. WTI finished 2018 at $45.41, after hitting a bottom of $42.53 on Christmas Eve.

The bonds of Petroleo Brasileiro SA extended gains Friday as investors eyed stronger crude oil and continued to consider the prospects for economic reform in Brazil with its new right-wing leader Jair Bolsonaro.

Bolsonaro was sworn in as president on Jan. 1. On Thursday, Bolsonaro announced via Twitter a privatization plan that looks to put 12 airports and four ports into private hands, potentially raising the equivalent of $1.85 billion for public coffers.

The jury is still out on whether the new president can garner the support needed for his reform plans including the thorniest: Brazil's state pension obligations. But there are some who are optimistic given Bolsonaro’s choice in Paulo Guedes to head up the ministry of finance, planning and industry. Guedes, a former banker with an economics degree from the University of Chicago, supports deregulation, privatization and pension reform.

Fixed-income investors have been favoring Brazil over Mexico in the last few months, especially after Mexico’s new president, Andres Manuel Lopez Obrador, followed through with a campaign promise to cancel the Mexico City Airport, and despite a budget unveiled in mid-December, which displayed fiscal discipline by the leftist government. The government outlined a non-financial public sector deficit of 2.5% of GDP and a 1% primary budget surplus for 2019.

Petrobras’ 7 3/8% notes due 2027 were at 106.70 at midday on Friday, which was up three points this week from 103.47 on Wednesday.

Petrobras’ 7.25% notes due 2044 traded up about 0.5 point to 100.83. That’s up from a low mark on June 16 of 90.5.

Petrobras’ 6.85% notes due 2115 were at 91.77 also up 0.5 point from Thursday when it was around 91.25 and up from about 87 in October.

Primary market still quiet

The stronger tone in EM debt bodes well for new issuance that has mostly been on hold since early December. The expectation was that the primary would get going again next week, which will be 2019’s first full trading week.

Now there are reasons for issuers that might have been on the fence to bring a deal.

“Tone is solid today,” the MENA trader said.

© 2015 Prospect News.
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