NEW YORK, Aug 5 (IFR) - Latin American credit markets suffered from broader selling pressures on Wednesday as investors cut risk in emerging markets during the summer months.
“It is not just Brazil anymore,” Klaus Spielkamp, head of fixed-income sales at Bulltick, told IFR. “We have seen sellers in Colombia, Costa Rica (and other countries).”
Investors are rebalancing portfolios away from emerging market assets in anticipation of a Fed rate hike this year, the Institute of International Finance (IIF) said this week.
The trade group said heightened refinancing risks as EM currencies sink against a rising dollar, a commodities price slump and a worsening outlook for EM exports as Chinese growth slows are among the challenges facing the asset class.
“Together with expectations of rising US rates, these developments have helped trigger a sustained rebalancing of international investors’ portfolios away from EM assets, particularly equities and to a lesser extent bonds,” it said.
This comes as traders expect a rebound in EM CDS trading as credit risks rise, despite a recent drop in turnover.
EM CDS trading volumes hit US$275bn in the second quarter, a 29% decline from the same period last year and a 28% fall versus Q1, according to trade organization EMTA.
“I expect volumes to rebound, as deteriorating credit fundamentals in EM are generating renewed interest to hedge exposure,” Simon Sassenberg, a CDS trader at Bank of America Merrill Lynch, said in a statement.
“A higher interest rate environment will contribute to increase macro stability.”
Unsurprisingly, Brazil CDS recorded the highest trading volumes over the second quarter to hit US$55bn, followed by Russia at US$34bn and Turkey at US$30bn.
Fears that at least one rating agency will demote the Brazilian sovereign to junk has only added to concerns about the country’s flagging economy and the political risks arising from a corruption investigation at state-owned oil entity Petrobras.
“Nobody wants to step in right now, though many bonds are cheap compared to a few weeks ago,” said Spielkamp.
Among the few exemptions are bonds issued by two regional plays - telco provider Sable and insurer Sagicor - both of which have jumped several points since pricing.
Sable’s new 2022 were being quoted at around 101 earlier today after pricing last week at 98.644, while Sagicor’s 2022 were spotted as high as 101.00-102.00 versus a reoffer of 98.727.
“There are many happy holders as investors are reluctant to sell such a quality company at such a high yield,” one analyst wrote about Sagicor this morning. (Reporting by Paul Kilby; Editing by Marc Carnegie)