November 10, 2016 / 5:56 PM / 2 years ago

LatAm debt extends losses as market weighs Trump policies

NEW YORK, Nov 10 (IFR) - LatAm debt markets extended losses Thursday as investors digested the full implications of a Donald Trump presidency and the recent back-up in US rates.

A sell-off in Latin American FX and equity markets was quick to spill over into the region’s credit markets where corporate and sovereign bonds were between 20bp-50bp wider.

The Brazilian currency slumped over 5% to 3.3902 against the dollar earlier in the morning, while the Mexican peso tumbled 3.5% to hit 20.60 per dollar.

The 2026 bonds issued by Mexico, the target of much of Trump’s trade and immigration rhetoric, widened about 30bp to hit a G-spread of 193bp late morning, a banker told IFR.

Brazil’s 2026s, meanwhile, were trading close to 50bp wider in spread terms to hit G+325bp.

“The broader Latin America market wasn’t as focused on trade yesterday and were on a sugar high from the fact that Trump hadn’t said anything negative in his acceptance speech,” the banker said.

EM investors are now weighing the full impact of Trump’s anti-trade rhetoric and a fiscal stimulus plan that could send US Treasury yields higher after an already abrupt back-up in rates.

The yield on the 10-year US Treasury stood at 2.083% on Thursday, up from 1.783% on Friday.

“Today people are realizing that what is good for the US might not be so good for emerging markets,” said Ricardo Navarro, a portfolio manager at asset management firm Noctua.

“You add to that a much expected Fed tightening in December, and you end up with a flight from EM.”

This comes after JP Morgan moved EM hard currency debt to underweight on Wednesday, while also readjusting its year-end spread target on its EMBI Global Diversified Index to 375bp from 325bp.

That index, which tracks external debt in emerging markets, closed on Wednesday at 330bp.

“EM sovereign credit should see pronounced price action given the direct implications on trade and growth prospects,” analysts at the bank wrote Wednesday. (Reporting By Paul Kilby; editing by Shankar Ramakrishnan)

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