The recent rise in US Treasury bonds has
jolted Latin American borrowers – along with the rest
of the issuing community that uses treasuries as a pricing
benchmark – out of an easy period of cheap funding,
and put many LatAm bond deals on hold.
As investors globally study the uneasy
economic recovery in the United States, and the US Federal
Reserve’s likely reaction to it, investors are
nervously positioning in a bid to play the rate change
profitably. Already cash is thundering out of emerging
"It’s a major shift," said
Jim Barrineau, portfolio manager at Schroders. "The provision
of liquidity by the Fed has been unprecedented and long
lasting. To reverse that, even if it’s going to be
a multi-year process, is going to create volatility. Without
trying to predict specific levels, it seems obvious this is
going to be a long process."
He notes he has reduced exposure to
corproates in dollars. "If you start with the sovereign
picture, every 10 year and over 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,
corporate debt will reprice relative to sovereign debt."
Générale believes US 10-year yields could rise as
high as 2.75% at the end of 2013 – from 2.18% in early
"That means the correction is only just
starting," said Benoît Anne, head of EM strategy at the
French bank, which expects US quantitative easing to begin
tapering off in September.
"We’re waiting for what we
call the real money capitulation, when long term investors will
start to offload their EM bond position, he said. "That might
have started, but really it’s not over."
Despite the uncertainty, the
world’s largest bond fund is relaxed about the
possibility that the Fed will abruptly hike rates.
"If US interest rates were to rise
significantly, virtually all dollar issuers whether sovereign
or corporate would be affected," said Ignacio Sosa, EVP, for
emerging markets product management at Pimco.
"This is especially true of issuers whose
local markets are not developed enough to serve as an alternate
source of funding," Sosa said. "Nevertheless, Pimco does not
believe that US rates are poised to dramatically accelerate
higher in the near term."
Opportunities remain. Barrineau identified
Brazil’s local market as a favorite, following
recent adjustments to the IOF picture. Flows have gone both
ways in the wake of the decision, but the net result should be
"There’ll be some back and forth there. But if the
currency is going to be more stable, the absolute levels are
also pretty attractive," he said.
For a full discussion of the changing
interest rate environment, see the July edition of
LatinFinance, online from June 28.