Monday, 16 February 2009

IDEAGlobal Sees Mexico, Colombia Debt Prices Under Fire Due to U.S. Recession. Colombia Bond Yields Should Rise Further.

In a short note e-mailed to customers this morning, IDEAGlobal, the New York-based market research company, sees Colombia and Mexico as two of the most scrutinized Latin economies amid the tailspin experienced by the U.S. economy. ''In the debt market, Mexico has suffered some important setbacks, not only as a consequence of the evident large positive correlation between this economy and its neighbor to the north, but also due to an unnerving jaunt into the new issuance market in the latest week, where this nation became one of the first investment-grade emerging market credits forced to pull an intended long-duration paper due to lack of interest,´´ says IDEAGlobal, referring to Mexico's five-year sovereign bond sold last week (a complete rarity in the asset class.)

Spreads between the respective sovereign curves have been tightening, mostly due to Mexico's sputter, says IDEAGlobal. In focusing on the differentials between Colombia's 2014 benchmark and Mexico's 2015 Global, ''the current 50 basis-point differential with which Colombia trades over Mexico is now the tightest post-crisis level that we've experienced. Spreads between these bonds have traded much tighter for prolonged periods, but this has been only in very bullish, risk-tolerant surroundings for emerging markets, a backdrop that is unlikely to re-emerge anytime soon.´´ But, the most plausible explanation may be, it seems to me, that Mexico has been producing a glut of its own paper in recent months ($6 billion of sovereign and quasi-sovereign paper that came to markets since December,) and the U.S. recession side effects-related underperformance of Mexican debt. IDEAGlobal says ''Colombian spread levels have yet to fully assimilate the increasingly darkening skies on the horizon for the finances of this sovereign, while Mexico is significantly ahead in this camp.´´ Therefore, more declines in Colombian debt prices loom. The credit is under pressure as the economy unravels too fast and there is a perception of inaction by the authorities (see our posting today on trade and interest rates, and policy conundrums.)

Finally, IDEAGlobal recommends using ''the spread narrowing to bet on more trying circumstances ahead for Colombia, with Mexico hurting, but already ahead in the game of absorbing negative developments.´´ Investors should target 75 to 80 basis-point spreads, and stop out if they fall below 30 basis points. We apologise we have no graphs available for this posting.

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