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“Year of windows” for bonds

Apr 3, 2014

Companies and sovereigns face a challenging scenario in the next few months to raise funds at good prices

Latin American borrowers are waiting on the sidelines to take advantage of windows of opportunity ahead as the US Federal Reserve winds down quantitative easing and hints at an eventual rise in interest rates later this year.

Activity in the Latin American origination market was sluggish in the first few months of 2014 as strong volatility in Emerging Markets as a whole, weak investor sentiment and higher rates compared to last year pushed potential borrowers to the sidelines. But many have rushed to the market in recent weeks in a bid to obtain funds ahead of an expected raise in US interest rates.

What remains of 2014 and the first half of 2015 will probably be a "year of windows", Ricardo Navarro, Itau's head of LatAm DCM, told LatinFinance in an interview last week. A big window may open in June or July this year that would lead to a rally of new issuances, he said. Potential issuers were concerned about the outlook for the second half of the year, because they face the unwinding of QE in the US and the possibility that the Fed may raise rates.

"That may trigger a window where people may see US Treasuries at 2.75%. If you see the improvement of sentiment toward emerging markets that you've seen over the past week, you may see spreads compressing another 20bp or 30bp," he said. "I think there you're talking rates that are attractive for people again. And I think that if you get two or three months of that stable environment ahead of the Fed raising rates, I think that will get people excited," he said.

Marzo Bernardi, executive director at Western Asset Management said the market was anticipating a faster hike in rates than was likely and he forecast that the end of tampering will not have a huge impact on pricing.

"What's being communicated is that by end of 2015 probably you're going to see 1% rates and by the end of 2016, 2.25%," Bernardi told LatinFinance's annual IDB Breakfast Roundtable last week.

"When you look at the price of the Eurodollar market today, it's pricing a little bit over that … Whatever's going to happen with China and for emerging markets and for the US economies, how the growth perspective is going to unfold, I think that's going to be the driver, for pricing for emerging markets," he said.

Meanwhile, other noise and political uncertainty toward the end of 2014 and the first half of 2015 may complicate the scenario for potential issuers. "You have the World Cup, you have elections in Brazil, elections next year in Argentina, elections in Colombia, some political noise in Peru. I think the political headwinds are there but I think you'll find gaps," said Navarro.



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