June 24 (IFR) - A bigger-than-expected spike in US Treasury yields has laid waste to the prospects of any new issuance out of Latin America this week, as markets fret over the potential damage outflows could inflict on the region and emerging markets in general.
“We will see absolutely nothing if markets continue like this,” said a syndicate manager. “At some point it will stop and turn around. There are names that are ready to come now, but no one wants to buy anything that will be worth less tomorrow.”
The LatAm pipeline is becoming increasingly crowded as deals back up after a slow June, with one banker pointing to about USD9bn worth of LatAm issuance ready to go if markets turn around.
The realization that rates are now on an upward path may force issuers to come sooner rather than later, potentially making for a busy summer due to the growing backlog of deals.
Aside from Pemex, Odebrecht Offshore Drilling, Banco do Brasil and BNDES, which have all finished roadshows, several requests for proposals out of Colombia and Peru, including one from Ecopetrol, are heard making the rounds.
“Once issuers realize the paradigm in rates has shifted, they will start to pull the trigger fast as rates are going to go up,” said the banker earlier this month.
For now, however, LatAm debt prices remain hostage to the normalization of US rates amid expectations that the Fed will start easing QE asset buying later this year.
LatAm high-grade cash names have gapped up to 25bp wider in the secondaries today, though traders are reporting little if any real trading except in large liquid benchmarks.
Petrobras 2023s and 2043s are about 20bp wider at 355bp-345bp and 362bp-352bp, for example. On Thursday those bonds were trading at 330bp and 335bp, respectively.
“I don’t think any bank anticipated seeing the US Treasury yield at 2.66% (so soon) even on Friday,” said a trader. “This has caught many people by surprise.”
High-grade sovereign names have also been marked lower with Brazil 2023s falling a good two points to trade at 83.50-83.75.
Mexico 2022s have followed a similar trajectory downward, plummeting to 95.25-95.50 versus a 97.00 mid market close on Friday. Five-year CDS, however, is off earlier intra-day lows to trade at 215bp, or flat on the day, after reaching as wide as 228bp this morning.
Bonds are looking cheap, but few investors are willing to step in at this stage until volatility, not to mention fears of redemptions, subside.
“There are a lot of buying opportunities and a lot of this stuff is cheap, but today it is capitulation,” said an EM corporate investor. “The carry trade is over and there will be more outflows.”
Bank of America Merrill Lynch downgraded Brazil’s external debt from overweight to market weight, while also shifting Peruvian debt to underweight from market weight.
The bank said Brazil is particularly vulnerable to the slump in commodity prices and spike in US rates, as the country’s poor economic conditions combined with the strong liquidity in its sovereign bonds make it a good candidate for short positions in the current sell-off of EM debt.
With inflation at the top end of the Central Bank’s target band and the government facing unrest over social spending, the country has less room to maneuver on both the fiscal and monetary front.
Meanwhile, Peru’s economy is suffering from a marked deceleration, with BAML forecasting 4.4% growth this year versus 6.3% in 2012 as weaker commodity prices and slowing investment in mining takes its toll.
A growing current account deficit has also made the country vulnerable to higher rates and EM outflows.
“If a major macroeconomic adjustment of the current account materializes, it may affect growth prospects further,” the bank said. “In this context, government popularity is falling, which poses an additional political risk.”