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 markets.
“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.”
Société Générale believes US 10-year yields could rise as
high as 2.75% at the end of 2013 – from 2.18% in early June.
“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.