Emerging Oil Bonds Deemed Too Expensive to Rise With Crude

Updated on
  • U.S. rate hikes, tension from Mideast to Latam dim bond gains
  • Energy exporters’ notes climbed with oil during 2016 rally

In a sign emerging-market Eurobonds may have reached their peak, oil exporters’ foreign debt is getting little to no lift from the spike in crude prices.

The dollar bonds of Colombia, Iraq, Mexico, Nigeria, Russia and Saudi Arabia have all handed investors a loss since the end of August, even as Brent crude rallied 21 percent in the period to a more than two-year high of $64 a barrel. The bonds of Angola and Kazakhstan have barely budged.

Once propelled by a weakening dollar and a global hunt for yield, the yearlong advance for developing-nations’ Eurobonds is fizzling. The securities are looking expensive as political tension in the Middle East worsens, voters prepare to pick new leaders in some of Latin America’s biggest economies, Venezuela restructures its debt and the U.S. readies further rate hikes.

“The environment for emerging markets has deteriorated and the oil bonds have lagged the oil movement,” said Guillaume Tresca, a strategist at Credit Agricole CIB in Paris. “Investors are no longer complacent. The rally’s lasted almost a year so some people are happy to take a profit.”

Previous spells of bullishness in the energy market have tended to boost oil bonds. When Brent rose 33 percent in the first half of 2016, the dollar debt of Ecuador, Venezuela and Iraq returned at least 19 percent each. All major exporters saw their bonds climb.

The waning impact of oil on countries’ debt is similar to the trend in foreign-exchange markets. The historic correlation between crude prices and petrocurrencies such as the Norwegian krone, Canadian dollar and Russian ruble has weakened since July.

The main difference today, for bond and currency investors, is the dollar’s rebound as the Federal Reserve readies more rate hikes. Since hitting a trough on Sept. 8, the greenback has gained 3.6 percent, paring its loss in 2017 to 7 percent, according to Bloomberg’s spot index for the currency.

Tough Call

And emerging-market Eurobonds are no longer as attractive after their rally. Spreads over U.S. treasuries were almost as low as 300 basis points in late September, a level last seen three years earlier when oil traded around $100 a barrel, according JPMorgan Chase & Co. indexes. The gap was 395 basis points in November 2016.

“In the past, say a year ago, the oil price rebound would’ve given these nations’ Eurobonds a much bigger boost,” said Ogeday Topcular, who oversees $300 million of fixed-income assets at RAM Capital SA in Geneva. “They were trading really cheap. The equation changed in mid-September and now dollar value and the yields are very important for emerging markets.”

Some investors don’t trust the oil-price gains, which are propelled by supply jitters stemming from Venezuela’s economic crisis and Saudi Arabia’s corruption probe, rather than strengthening global demand or actual supply declines.

“It’s a tough call with petro-sovereigns, because the rise in oil could be temporary,” said Richard Segal, an analyst in London with Manulife Asset Management, a $383 billion money manager. Apart from the bonds of a few nations such as oil importers Turkey and South Africa, “everything is expensive,” he said.

— With assistance by Colleen Goko

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