Tuesday, April 17, 2012

Spain, Argentina and Emerging Markets

Spain managed to place its Bill auctions today and though the paid far more than last time, at least people bought the debt. Thursday will be another test as Spain tries to sell 2 and 10 year notes but at least it is only 2.5 billion Euros so the market does appear somewhat complacent. Equities and credit both rallied today even as US economic data was less than rosy, with industrial production missing expectations and signalling a slowdown in the pace of economic growth towards the end of the first quarter. US Treasuries sold off but only by a few bps as the Federal Reserve continued with its buy backs. Today the Fed bought $1.8 billion of off the run 30 year bonds while tomorrow the plan is for them to buy back as much as $5 billion of 10 year notes. This probably generated some frustration from those shorting Treasuries as such a strong rally in equities that we had today would normally produce a big sell off in rates.

Argentina bonds were under continued pressure as investors both locally and internationally sold positions in reaction to the government's proposal to seize control of 51% of oil company YPF and effectively nationalize it. Argentina corporate bonds also suffered as the government proclaimed that all companies in Argentina are Argentine companies, implying there could be other nationalization targets in the future. It appears that President Cristina Kirchner may take a few pages from Venezuelan President Hugo Chavez's playbook and nationalize everything in sight. The fact is that Argentina has always been viewed as an emerging market and yields have repriced to the point that some investors may try to bottom fish a bit. Argentina yields have soared past Venezuelan bond yields and past some of the weakest rated US credits. Cristina has given us shock and awe but those who know the country may say that they are surprised that this event didn't happen sooner. US rates are extraordinarily low and expected to stay that way for a few more years so investors looking for a place to earn a better return will still seek out the emerging markets and events in Argentina will not scare them away.

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