Tags: emerging | market | anxieties | bonds

Emerging-Market Anxieties Jump by Most Since '08

Wednesday, 12 June 2013 10:47 AM

The biggest drop in perceived creditworthiness for emerging-market borrowers since the credit crisis is deepening as speculation intensifies that central banks will scale back record stimulus.

Prices on the Markit CDX Emerging Markets index, a credit-default swaps benchmark for debtor nations from Latin America to the Middle East and Asia, have tumbled 4 cents in the two weeks through yesterday to 107 cents on the dollar. The decline is the biggest since the failure of Lehman Brothers Holdings Inc. reverberated across financial markets and caused the index to plunge 6.7 cents in the period ended Nov. 18, 2008.

Investors who eight weeks ago were willing to lend Rwanda $400 million at an interest rate of 6.625 percent in its first debt offering are now struggling to find any haven as developing countries bear the brunt of the global bond rout. Emerging-market bonds have fallen 6.3 percent since the start of May, almost triple the overall market, as speculation mounts the Federal Reserve will lead policy makers in reducing support to bolster growth as economies from China to Brazil slow.

“There’s nowhere to run and nowhere to hide” from the unwinding of central-bank programs including quantitative easing in the U.S., said Jack Deino, a senior money manager who helps oversee about $2.7 billion in emerging-market assets at Invesco Ltd. in New York. “There’s been just a lot of money out there looking for yield. Part of the selloff is attributable to the pulling back of QE, and you can’t do anything about that.”

Littered Floor

Prices on Markit Group Ltd.’s emerging markets index of credit-default swaps, which typically rise as investor confidence improves, have fallen to the lowest level since November 2011, according to data compiled by Bloomberg. That’s down from 114.3 on Jan. 3, the highest since April 2011.

The loss on emerging-market debt since reaching an all-time high on May 2 on JPMorgan Chase & Co.’s EMBI Global Total Return Index compares with a 2.3 percent decline on the Bank of America Merrill Lynch Global Broad Market Index.

A $500 million 4.875 percent Bolivian bond issued in October and due in 2022 has tumbled to 93.5 cents from as high as 102.5 cents on the dollar on May 6, according to prices compiled by Bloomberg.

“The floor is littered with knives,” said Jeremy Brewin, who oversees more than $5 billion of fixed-income assets as the head of emerging-market debt at Aviva Investors, in London. “In a selloff, it’s a random experience. As much as I try to prove where things should be, I cannot.”

Hiding Places

Yields for borrowers in developing countries have climbed to 5.02 percent after reaching an unprecedented low of 4.04 percent on Jan. 24, according to the Bank of America Merrill Lynch U.S. Emerging Markets External Debt Sovereign and Corporate Plus Index. Relative yields on the debt reached 352 basis points, or 3.52 percentage points, the most since September.

“Safe assets are not entirely safe anymore,” Jeffrey Shen, head of emerging markets at BlackRock Inc., the world’s largest asset manager, said in an e-mail. “There’s not a whole lot of places to hide in the higher risk asset classes.”

Central bank policies holding down benchmark interest rates have enabled companies to borrow $1.9 trillion this year, 6 percent ahead of the pace in 2012, a record year with $3.97 trillion in sales, Bloomberg data show.

Tapering Signs

Investors are watching for signs of tapering after Fed Chairman Ben S. Bernanke said May 22 that the central bank could reduce $85 billion in monthly Treasury and mortgage debt purchases within “the next few meetings” if officials see signs of sustainable improvement in the labor market.

The Bank of Japan refrained yesterday from extending the length of loans it uses to smooth bond market volatility, according to a policy statement in Tokyo. Twenty of 23 analysts in a Bloomberg News survey forecast the BOJ would approve loans of two years or longer, or said that such a move was possible.

“It may be that we are seeing what happens when an overbought risk asset market adjusts to life without central bank largesse,” Gavan Nolan, director of credit research at Markit, wrote yesterday in a note to clients.

Spreads on emerging-market debt are normalizing after reaching “artificially low levels,” Nolan said in a telephone interview. Investors had failed to pay sufficient attention to each borrower’s risk when policies from the Fed and Bank of Japan drove money into developing-country funds, he said.

Funds Yanked

Investors pulled $1.5 billion from emerging-market bond funds in the week ended June 5, or 0.6 percent, paring this year’s inflows to 10.1 percent, according to EPFR data compiled by Bank of America Corp. strategist Jane Brauer.

“We’ve had a great run and now we have some doubt creeping into the picture,” said Scott MacDonald, head of research at MC Asset Management Holdings LLC in Stamford, Connecticut, which has about $600 million of assets.

Developing economies will grow 5.3 percent this year, the International Monetary Fund said April 16, after forecasting in January that growth would reach 5.5 percent. The forecast calls for growth of 1.2 percent for their advanced counterparts.

Rwanda’s expansion may slow to 7.5 percent this year from 7.7 percent in 2012, the IMF’s mission chief to the country Paulo Drummond said April 16. The country, rated B by both Standard & Poor’s and Fitch Ratings, five levels below investment grade, sold its debt April 16 at the lowest end of yield guidance given to investors, a person with knowledge of the deal said in April.

Turkey Protests

Anti-government protests in Turkey are threatening to drive away investors who had been lured by higher yields, falling debt levels and credit-rating upgrades. Credit swaps tied to Turkish debt, which pay the buyer face value if a borrower fails to meet its obligations, soared to 184 basis points yesterday from this year’s low of 110.9 on May 9, Bloomberg data show.

“That’s reminding people that political risk is still present,” Markit’s Nolan said. “When you’ve got this massive excess liquidity in the market, the likes of the political risk of Turkey can get overlooked.”

Elsewhere in credit markets, the cost to protect against losses on corporate bonds in the U.S. rose for a second day, approaching a two-month high. Leveraged loan prices in the U.S. dropped to a more than three-month low. Federal-Mogul Corp., the auto-parts supplier controlled by billionaire Carl Icahn, proposed the rate on a $1.75 billion term loan it’s seeking to refinance debt.

European iTraxx

The Markit CDX North American Investment Grade Index, used to hedge against losses or to speculate on creditworthiness, rose 1.4 basis points to a mid-price of 85.5 basis points, according to prices compiled by Bloomberg. The index, which reached 88.7 basis points on June 6, the highest intraday level since April 5, climbed to as high as 87.8 in early trading yesterday.

In London, the Markit iTraxx Europe Index, tied to 125 companies with investment-grade ratings, rose 5.1 to 111.5.

Both indexes typically rise as investor confidence deteriorates and fall as it improves. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

Bonds of Fairfield, Connecticut-based General Electric Co. were the most actively traded dollar-denominated corporate securities by dealers yesterday, accounting for 3 percent of the volume of dealer trades of $1 million or more, according to data from Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

Leveraged Loans

The S&P/LSTA U.S. Leveraged Loan 100 Index declined 0.14 cent to 97.78 cents on the dollar, the least since March 6. The measure, which tracks the 100 largest dollar-denominated first-lien leveraged loans, has returned 2.44 percent this year.

Leveraged loans and high-yield, high-risk, or junk, bonds are rated below Baa3 by Moody’s Investors Service and lower than BBB- at S&P.

Federal-Mogul’s seven-year loan will pay interest at 3.5 percentage points to 3.75 percentage points more than the London interbank offered rate, with a 1 percent minimum on the lending benchmark, according to a person with knowledge of the transaction, who asked not to be identified because the deal is private.

The debt is covenant-light, which means it doesn’t carry typical lender protection provisions such as financial maintenance requirements, and may be sold to investors at a discount of 99.5 cents on the dollar, the person said.

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The biggest drop in perceived creditworthiness for emerging-market borrowers since the credit crisis is deepening as speculation intensifies that central banks will scale back record stimulus.
Wednesday, 12 June 2013 10:47 AM
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