Credit-default swaps on bonds sold by Brazil, Russia, India and China (BRIC) are closing in on those tied to the world’s largest economies, which were piling on debt in an attempt to stoke growth.
Record demand for emerging-market bonds is driving down the relative yields that investors seek to own the debt. Developing nations will grow 6.4 per cent next year, while developed economies will expand 2.2 percent, the International Monetary Fund said last week.
“Emerging markets don’t have the problems that developed markets are having right now,” said Mikhail Foux, a credit strategist at Citigroup Inc in New York. “They don’t have a heavy debt load. They’re growing. A lot of them export commodities and the price of commodities is increasing. Their populations are young and growing. So people feel really good about emerging markets in general.”
PDVSA offering
Elsewhere in credit markets, Petroleos de Venezuela SA (PDVSA) plans to sell $3 billion of bonds in its local market to help finance the company’s investment plan and government housing projects. Deutsche Bank AG priced a $300 million collateralized loan obligation (CLO) for Garrison Investment Group. Credit-default swaps on J C Penney Co jumped to the highest in 18 months.
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PDVSA will provide details on the sale of the 2017 bonds in a prospectus on October 18, the Caracas-based company said in an e-mailed statement. Investors will be allowed to buy the dollar-denominated bonds with bolivars.
Venezuela, which sets two exchange rates for imports and a third rate that is determined by the central bank, is seeking to meet demand for dollars among companies and individuals, after President Hugo Chavez closed the unregulated currency market in May. On October 2, Chavez said that half the proceeds of the PDVSA sale will help finance the construction of low-income housing. PDVSA, the state oil company, sold $6.3 billion of bonds last year and $1.04 billion of debt in August.
Garrison CLO
A $164.5 million A-1 portion of the Garrison CLO, rated AAA by Standard & Poor’s, will pay lenders 240 bps more than what the London interbank offered rate, people familiar with the transaction said on condition of anonymity. A $25 million A-2 piece, also rated AAA, will pay 240 bps more than Libor and was sold at a discount, sources said. Libor is the rate banks charge to lend to each other. Amanda Williams, a Deutsche Bank spokesman, couldn’t immediately be reached for comment. Brian Chase, chief financial officer at Garrison, declined to comment.
The cost to protect against losses on J C Penney bonds jumped 36.5 bps to a mid-price of 279.8, according to CMA. The contracts soared 50 bps in the final two days of the last week as activist investor William Ackman’s Pershing Square Capital Management LP disclosed a 16.5 per cent stake in the Plano, the Texas-based department-store chain.
Benchmark credit index
The hedge-fund firm plans to engage in talks with J C Penney’s board and managers regarding the company’s performance, according to a filing with the US Securities and Exchange Commission. Vornado realty trust said in a separate filing that it had acquired a 9.9 per cent stake. A benchmark indicator of the overall US corporate credit risk climbed for the first time in a week.
Credit-default swaps on the Markit CDX North America investment grade index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, increased 0.5 bps to a mid-price of 97 at 5:18 pm in New York, according to index administrator Markit Group Ltd. In London, the Markit iTraxx Europe Index of 125 companies, with investment-grade ratings, rose 3.4 to 101.38, the biggest jump since September 22. The indexes typically rise as investor confidence deteriorates and fall as it improves.
Morgan Stanley Bonds
Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point, 0.01 percentage point, equals $1,000 annually on a contract protecting $10 million of debt.
Bonds from New York-based Morgan Stanley were the most actively traded U.S. corporate securities by dealers on Wednesday, with 121 trades of $1 million or more, according to Trace, the bond- price reporting system of the Financial Industry Regulatory Authority.
In emerging markets, the extra yield investors demand to own corporate bonds rather than government debentures fell 11 basis points to 254 basis points, or 2.54 percentage points, the lowest since April 26, according to JPMorgan Chase & Co. index data.
Petroleos Mexicanos’s $750 million of 6.625 percent perpetual notes rose 1.9 cents on Wednesday to 104.25 cents on the dollar, Trace data show. It was the biggest increase since Pemex, as Latin America’s biggest oil producer is known, issued the securities at par on Sept. 21, Bloomberg data show.
Fund Flows
A record $40.5 billion has flowed into emerging-market bond funds this year, more than four times the full-year high of $9.7 billion in 2005, according to data from research firm EPFR Global.
Developing economies around the world are outperforming advanced nations as European leaders seek to contain debt crises in Greece and Ireland and the U.S. budget deficit expands to $1.3 trillion as it seeks to jumpstart an economy that grew at an annual rate of 1.7 percent in the second quarter.
Brazil’s economy may expand 7.5 percent this year, up from a previous forecast of 7 percent, Finance Minister Guido Mantega said on Wednesday in New York.
“Brazil is enjoying high quality, sustainable growth, because it doesn’t generate macroeconomic imbalances,” Mantega said. “Investment on Wednesday is growing almost three times faster than the economy and we’re increasing productivity.”
Perpetual Bonds
The buying frenzy is allowing Brazilian companies to sell record amounts of perpetual bonds — in which they can repay principal at their discretion. Mexico sold $1 billion of 100- year-bonds last week in the first such sale by a Latin American government.
“Money is flowing more aggressively into emerging market credit, and the quality of new issues is starting to reflect that,” said Ashish Shah, co-head of global credit investment at AllianceBernstein LP in New York. “That’s the classic way bubbles get built.”
Mexico Central bank Governor Agustin Carstens said the debt won’t lead to a bubble. The Mexican economy is “solid” and inflation has been better than expected, he said in Mexico City on Wednesday.
Real Climbing
An index of swaps on 15 governments in central and eastern Europe, the Middle East and Africa exceeds a benchmark of western European creditworthiness by a record low 50 basis points, down from 161 in February, according to data provider CMA.
The Markit iTraxx SovX CEEMEA Index has fallen more than 20 basis points since it started trading in January and about 75 from its May peak to 195, while the Markit iTraxx SovX Western Europe Index rose 55 to 144.5, CMA prices show.
The record flow of cash into emerging economies has prompted some policymakers to act to slow the trend. Last week, Brazil doubled to 4 percent a tax it charges on some foreign inflows. The real has gained 4.5 percent this year to 1.6699 per dollar as prices on the commodities it exports climb. Sugar futures have jumped 52 percent since the end of June and on Wednesday reached the highest level since February.
China’s economy will likely grow 9.9 percent this year from a year earlier and will grow 10 percent in 2011, the Caijing Magazine reported on Wednesday, citing a report issued by the Chinese Academy of Social Sciences.
China’s exports are expected to increase by 27.3 percent this year and imports to rise 35.7 percent, bringing the country’s trade surplus to $165 Billion this year, Caijing said, citing the report.