LatinFinance - July 2013 - 12

US rates

12 LatinFinance

July 2013

mid-June shook global markets. Despite
the Fed governor’s emphasis that any
action would be more akin to “letting up
a bit on the gas pedal as the car picks up
speed” than a foot on the brakes, investors
readjusted their allocations sharply.
Emerging markets currencies were
hit hardest, followed by local rates, credit
markets and equities.
Said NWI’s Hariharan: “We are [in a
period of] heightened volatility. I frankly
haven’t seen moves like this in a very, very
long time. To have Mexican interest rates
move 30 to 40 basis points in a day.…”

Assessing the damage

6/19/13

In credit markets, the retreat
from EM has so far been most
pronounced in hard currency
funds, though investors
also withdrew money from
blended and local currency
funds.
Schroders’ Barrineau said
he had cut holdings of dollardenominated corporate debt.
“If you start with the
sovereign picture, every
10-year and longer bond is
going to be affected by the
Treasury sell-off. Rates have
to reset across the entire
spectrum. Sovereign debt is in
the process of being hit, and
corporate debt will reprice
relative to sovereign debt.
“It’s not that there’s
completely nothing to buy,
just that the market is going
to reset. And it’s going to happen with a
very high correlation – everything’s going
to sell off at the same time.”
The sharp reversal in sentiment killed
any hope Latin American borrowers may
have held of tapping dollar markets in late
May and early June. Even the US highgrade primary market had shut down by
the first week of June.
Cindy Powell, head of fixed income
syndicate at BTG Pactual, says EM
sovereigns should move to reopen the
market, while high-yield borrowers will
take longer to drum up appetite for a
deal.“Ultimately, the market will also
bounce back more quickly than you’d
expect,” she says.
6/5/13

5/22/13

5/8/13

4/24/13

4/10/13

3/27/13

3/13/13

2/27/13

2/13/13

1/30/13

1/16/13

1/2/13

paper. As outflows deepened and volatility
perception is that rates will start to
soared in June, investors had started to
increase quite soon.”
Odebrecht’s Fonseca, said the primary reappraise the prospects for emerging
market debt, amid talk that a re-pricing
market would open and close, and offer
of risk heralded the beginning of a more
unstable pricing levels.
profound structural shift in credit markets.
“It’s not a window any more, it’s a
“The correction is only just starting,”
small opening in the door,” he said. “We
said Benoît Anne, head of EM markets
might have some good opportunities [to
strategy at Société Générale.
print bonds]. Whenever we have a good
“We’re waiting for what we call the
combination of market conditions, a very
real money capitulation, when long term
good day, we still have investors looking
investors will start to offload their EM
for paper.”
bond positions. That might have started,
Daniel Rodríguez, CFO of Chilean
retail operator Cencosud, said he expected but really it’s not over.”
The first tremors of a bond market sellvolatility to pick up, though he noted
that since funding rates
remained low, debt sales
Reversal of fortune
were still relatively attractive.
Weekly EM and LatAm portfolio flows, Jan-Jun 2013 ($m)
Nevertheless, his company
itself had little need for
3,000
financing.
An improvement in the
2,000
US economy is also ultimately
beneficial for global markets,
1,000
Rodríguez said: “It could
be that potential higher
0
interest costs also will be
compensated by higher
-1,000
demand from the global
economy, which also is
-2,000
positive.”
Others were more
sanguine still about
-3,000
prospects.
Colm Delves, CEO of
Jamaican mobile operator
Source: EPFR
Digicel, said he was confident
there would continue to
be opportunities to issue.
He argued that improving economic
off came months earlier, with the January
conditions would ultimately drive down
release of minutes of the Fed’s December
spreads. Coupled with a modest rise in
Open Markets Committee (FOMC)
US Treasuries, high-yield borrowing costs
meeting. US Treasuries, which had been
should stay the same, or even fall, he said. trading between 1.6% and 1.8% for many
“This environment should be
months, sold off sharply, rising to 1.92%
supportive for high yield issuers –
in one day.
particularly issuers like ourselves who
In the weeks that followed, bond
have a proven record and a well-diversified traders pored over any hint from Fed
portfolio of operating markets – 31
governors over the direction of US
in total,” Delves said. “I suspect that
monetary policy. A suggestion by
there will continue to be windows for
Bernanke in May that the Fed would
opportunistic financings.”
consider tapering QE in the second half
of 2013 if, as expected, employment
‘Foot off the gas’
and growth data continued to improve,
But those opportunities, if they arise, will
spooked investors.
ultimately depend on demand for such
But his reaffirmation of that point in
LatinFinance - July 2013

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