NEW YORK, Feb 17 (IFR) - Brazil bonds were quickly taking back their gains from earlier Wednesday after S&P downgraded the sovereign to BB from BB+ with a negative outlook.
The surprise move took the wind out of a strong day for the region’s credit markets, with Brazilian assets trading 3/4 of point off recent highs in the wake of S&P’s announcement.
The sovereign’s 2025s were being quoted at around 82.25-82.75 after hitting 83.25 earlier in the day.
Bonds issued by state-controlled oil firm Petrobras were also sliding back after jumping around 2.5 points.
“We are now up about one point on the day (for Petrobras), but I think it will come off more,” said a New York-based trader. “This is likely to accelerate the likelihood of something happening with Moody‘s.”
S&P’s negative outlook raises the prospect of a drop to BB-, just a notch above single B.
Moody’s rates Brazil Baa3 with a negative outlook, while Fitch already has the country at BB+ with a negative outlook.
S&P now thinks there is a one-in-three probability of a further downgrade, given the higher risks of policy reversals.
“Execution risks to corrective fiscal policy remain high in the near term following the government’s inability to pass some budgetary measures in late 2015, which are now complicated by the impeachment proceedings of President Dilma Rousseff underway in Congress,” it said. (Reporting by Paul Kilby; Editing by Marc Carnegie)