Category Archives: Latam Bonds

State of Latin American Corporate Credit Market at August 10 2011

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So it appears the market has chosen to enter a liquidity crisis. Will run through the stats quickly:

Latam corporate bond spreads are at their May crisis wides:

Latam Corporate Spreads at 2011-08-10

Treasuries rates are at their lows:

US Treasury Rates at 2011-08-10

This is helping to maintain a steady yield in aggregate Latam Corporate Yields though this “calm” is not reflective of the dislocations occurring in the market as higher yield paper has no hard bids:

Latam Corporate Yields at 2011-08-10

The Latin American Corporate Bond Index is showing down 1.7% from its peak and down 1% month-to-date though I am not sure how much stale marks may play in these figures:

Latam Corporate Bond Index Value at 2011-08-10

According to my S&P 500 model, fair value of the S&P 500 is not 1220-1250, so the market is still in oversold territory by the model, but the unfolding banking crisis occurring in Europe (discussed below) renders statements about fair value extremely suspect:

S&P 500 Index Model at 2011-08-10

The state of the bank CDS market is extremely alarming. 5 year CDS spreads of Societe Generale (France) is bid at 260 – its 3 year high:

Societe Generale 5 Year EUR CDS Spread BID as 2011-08-10

Other banks showing similar type graphs are Unicredito (Italy), Commerzbank (Germany), and Bank of America (US).

To have one megabank in stress is bad enough. To have multiple spread around the world is exceptionally bad. This doesn’t seem to be getting much press – perhaps for fear of causing a bank run, but when one looks at the balance sheets of these banks (European banks are levered 15-20 to 1 and US banks are levered 10 to 1) and the recent equity performance of the banks, one should be worried.

The Fed’s recent announcement of keep rates low for another two years doesn’t address the problem of credit quality and leverage of the balance sheet of these banks.

If these banks start to have funding problems, the market will spiral down again.

To me this argues for very low leverage and moving as high up in the capital structure as possible, though the indications are there for a repeat of 2008.

Latin America is not the problem in all of this – its banks are strong and corporations are performing (more or less), but it should continue to trade in sympathy until capital reallocates.

On the whole, a bad situation….

Um abraço,

Arthur O’Keefe, São Paulo Value

State of Latin American Corporate Credit Market at August 7 2011

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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