While the market decides if it is going to a enter a liquidity crisis, Latam spreads have started to widen in sympathy to the market. Spreads are 35bps wider month-to-date.
Latin America Corporate Bond Spreads for bonds in USD:
Latam Corporate Spreads at 2011-08-07
At the current level of 340bps the market is nearing the May 2010 (Greece part 1) liquidity crisis levels.
Treasuries helped make July a stellar month for Latin American Corporate Bonds, but, now that they are choppy, they are not helping as much to maintain a steady yield for the Latam Bond Index. 10 year US Treasuries are 20bps tighter month-to-date at 2.56%
US Treasuries:
US Treasury Rates at 2011-08-07
As a result Latam Corporate Bond Yields are roughly 10 bps wider from month end to yield about 6.00%:
Latam Corporate Yields at 2011-08-07
Given the duration of Latam bonds, this has driven the bond index down about 90bps month-to-date:
Latam Corporate Bond Index Value at 2011-08-07
Will see where this finds a bottom, but generally sell-offs in Latam Corporate Bonds, considering the growth characteristics and fiscal condition of the region, presents an attractive investment opportunity.
Another sign that things may improve for the asset space is that 26 week (6 month) correlation of spread returns (lately negative) to the returns of the S&P 500 (very negative) is approaching a high:
Rolling 26 Week Correlations between Latam Spread Returns and S&P 500 Returns at 2011-08-07
Given that the primary concerns are growth (and secondary concerns are the futures of various developed markets) we may see equities continue to lag while credit spreads may hold or rally given their elevated levels.
A variant scenario is that current fair value of the S&P is 1180-1315 with best guess of value at 1260, so with the S&P at 1200 we may see a relief rally which would aid Latam Corporate Bond spreads in tightening driving returns.
Current S&P 500 Model:
S&P 500 Index Model Valuation at 2011-08-07
S&P earnings are still strong and estimates have yet to come down, which is a very different scenario from 2008 when earnings were falling with estimates also being revised down by the time the Lehman led liquidity crisis struck.
On the bear side, a government/sovereign credit crisis is uncharted territory in recent times. I believe this last happened in the 30s.
So much more analysis and monitoring is required. Will keep you posted.
Abraço,
Arthur O’Keefe, São Paulo Value
