Emerging debt-Mexico catchs up with Brazil in volatile trade

Tue Jun 3, 2008 2:59pm EDT
By Walter Brandimarte
NEW YORK, June 3 (Reuters) - Mexican sovereign debt prices rose on Tuesday, catching up with a recent rally in Brazilian bonds, but a sharp fall in commodity prices reduced investors' appetite for the asset class in general.
Volatility remained high as safe-haven U.S. Treasuries reversed initial losses to post gains in the afternoon, buoyed by demand from risk-averse investors.
Yield spreads between emerging markets bonds and U.S. Treasuries, considered a key gauge of risk aversion, widened seven basis points as a result, reaching 254 basis points on the benchmark JPMorgan EMBI+ index 11EMJ.
But Mexico's spreads bucked the trend, narrowing two basis points on the EMBI+ to 135 basis points. According to analysts, investors were adjusting relative prices following a two-day rally in Brazilian bonds, which started when Fitch upgraded the credit to investment grade last week.
"Brazil has been trading inside Mexico, even though it's a lower-rating credit. That created a relative-value distortion and so now the markets are arbitraging out the difference," said Siobhan Morden, Latin America strategist with ABN AMRO in New York.
Mexico's global bond due 2034 MEXGLB34 was 0.875 point higher in price, bidding at 111.625, while Brazil's global bond due 2037 lost 0.375 point in price, to bid 117.563.
Despite its gains, spreads between the Mexican paper and 30-year U.S. Treasury notes were still at 123.3 basis points, wider than the 120.7 basis-points spread seen at the Brazilian 2037 bond.
Rob Zukowski, senior technical analyst at 4CAST, said he expects Brazilian long-dated bonds to post more losses as U.S. Treasuries sell off.
"I'm a little bit bearish on the long-end of the Treasury curve in the U.S. and I think that the Brazil 40 would suffer, sell off a little bit more, following Treasuries lower," he said.
Venezuelan bonds also posted losses as U.S. crude prices CLc1 slipped more than 2 percent, weighing on the economic outlook for the oil-exporting country.
Venezuela's risk spreads widened 12 basis points on the EMBI+, to 602 basis points, while the country's global bond due 2027 fell 0.313 point in price, to bid 93.750.
Argentina's risk spreads also widened 10 basis points on the EMBI+ as farmers decided to extend their strike over a controversial export tax on grains for another week. [ID:nN02285469]
Farmers are demanding changes to a sliding-scale export tax system that raised levies on soy products. The government last week unveiled some unilateral modifications to the taxes, but farm leaders said the measures were not enough.
Meanwhile, Panama continued with its offer to exchange high-cost bonds due 2011 and 2012 for paper maturing in 2029. For details, see [ID:nN02305692].
As part of the deal, Panama will reopen its 2029 bond for an additional sale of as much as $500 million, potentially doubling the principal outstanding amount of the security.
The exchange offer, which ends this afternoon, "offers an attractive yield pick-up given the price concessions the Panama government is offering," JPMorgan analysts said in a research note.
"Overall, we remain comfortable with fundamentals in Panama, due to strong growth momentum, despite the global slowdown, and Canal expansion remaining on track so far," the bank said, noting that improvement in government debt ratios might drive the country into the investment-grade club in 2009.