Emerging market sovereign debt tracked the gyrations in equity markets on Friday, with wider spreads at the open reflecting concerns US economic growth will slow while more credit problems lurk in the bank sector.
As equities pulled back to near the break-even point for the day in the United States and benchmark US Treasuries have rallied on the gloomy outlook, emerging market debt spreads improved slightly, but investors exercised caution.
"It is frankly what has been the main driver for emerging markets over the last three months. Nothing in the last three months is the result of anything that was fundamentally wrong with these credits," said Jeff Grills, co-head of J.P. Morgan Asset Management's emerging market debt fund in New York.
The benchmark J.P. Morgan Emerging Markets Bond Index Plus widened another five basis points to 203 basis points over stronger US Treasuries. On Thursday spreads widened by 12 basis points. "The market is really following equities. We opened much wider when stocks fell sharply but we've narrowed that gap in line with stocks rebounding. We're still wider on the day and this correlation will continue into next week," said one trader at a German bank in New York. Emerging market debt prices were only a little weaker and many of the cash bond issues were mixed.
Brazil's benchmark 2040 bond was unchanged with a bid of 134.063, yielding 5.546 percent. However five-year credit default swaps, which provide protection against defaults and restructurings, widened two basis points to 91.
Venezuela, which should be benefiting from record high oil prices saw its benchmark 2027 bond fall 0.375 points in price to bid 109.063, yielding 8.306 percent. The five-year CDS is wider by 17 basis points to 367 basis points.
Investors are nervous about putting money to work in Venezuela, even with record energy prices, due to the re-nationalising of its oil industry and lack of investment, plus higher social spending that is putting upward pressure on inflation.
"If you are buy and hold in a country like Venezuela, in our opinion, you are going to be amply rewarded given what is going on in oil," said J.P. Morgan's Grills. Additionally, Venezuela announced on Friday that it would issue new debt over the next five months to reduce monetary liquidity that has fuelled Latin America's highest inflation and pressured a rapidly depreciating currency.
Comments
Comments are closed.