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Emerging bonds on the run
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August 21, 1998: 12:46 p.m. ET
From Moscow to Buenos Aires to Johannesburg, debt markets retreat
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NEW YORK (CNNfn) - As the global emerging debt market's crisis of confidence spread Friday from Russia to Latin America, analysts said the market's mood is now worse than during Mexico's "Tequila" debt crisis four years ago.
Investor selling is now indiscriminate across all high-yield markets, they said, and the migration to "safe-haven" debt markets in the U.S. and western Europe has become a pronounced flight.
"This one is much worse than 1995 and there is more of this to go," said David McWilliams, debt strategist at Banque Nationale de Paris in London.
Continental waves of fear
With the price of restructured Russian dollar debt now trading at less than a fifth of its face value following Monday's announcement of a short-term debt moratorium, pricing has become almost irrational.
"Ironically, Russia is not the one suffering anymore," said McWilliams at BNP. "It's everybody else who hasn't suffered over these last two to three days that is now getting hit."
Latin American debt was chief among these fellow sufferers Friday as investors fled the continent out of fear that the specter of currency crisis currently stalking Russia and the Pacific Rim might spread to South America.
Venezuelan Brady bonds, plagued by devaluation fears in recent days, are now around their lowest levels since 1995, when currency exchange controls were still in place and the country suffered the worst banking crisis in Latin America's history.
The country's benchmark DCB debt issue extended Thursday's spectacular losses -- off 3-3/4 percentage points at 42-7/8 bid -- while its par bonds were down 2 percentage points at 57-1/2 bid.
Argentine debt, which had been somewhat immune to the recent sharp drops in the emerging debt markets, lost as much as 6-1/2 points to 67 bid for its discount bonds on Friday alone. Its FRBs plunged 6-1/2 to 74 bid.
Brazilian debt also was battered, with the country's "C" bonds down 3-1/4 percentage points at 56-1/4 bid and its global bonds due 2001 off a whopping 9-3/8 percentage points at 84 bid.
Eastern and Central Europe and African debt also took a hammering, with Bulgarian IABs off 8-7/8 at 45-3/4 bid and Nigerian pars down four percentage points at 55 bid.
Czech bonds plunged lower at Friday's close, with the benchmark government 10.90/03 falling to 96.10/40 on a yield of 11.981/896 compared to 97.90/20 at Thursday's close.
"Poland and Hungary were hit earlier in the week and now the wave has hit the Czech Republic with full force," said IPB bond dealer Pavel Tichy, adding that the 12.2 billion crown July trade gap disclosed earlier in the day was "tragic."
The Russian financial crisis has staggered markets in former Soviet satellites, but some may view it as a mixed blessing, as it could provide a chance for markets like Ukraine to step out from Russia's shadow.
"Ukraine can distinguish itself, but it will distinguish itself by not defaulting (on debt)," said Patricia Bartholomew, economist at investment house Wood & Company in Kiev.
However, she warned that there is growing pressure for Ukraine to devalue its currency. Russia accounts for 40 percent of the republic's trade.
"If we assume Ukraine and Russia work as normal economies, for Ukraine not to devalue if Russia devalues would be economic suicide," Bartholomew said.
In Africa, South African benchmark bond prices fell sharply in a thin, nervous market, with yields on the R150 up more than fifty basis points to 17.92 percent, a 10-year record.
Analysts said Johannesburg will remain bearish until interest rates -- hoisted more than 6 percentage points since mid-May to around 24 percent to defend a sickly rand -- start coming down.
The big bond picture
"Everything is down and down and down and down and down," said Chris Portman, senior emerging market analyst at ANZ Investment Bank in London.
Although the closely watched J.P. Morgan EMBI (emerging market bond index) was still off historic levels reached during the "Tequila" crisis in April 1995, the explosion in yield spreads this week showed spreads were rapidly approaching those levels.
At the height of "Tequila" in April 1995, yield spreads on the EMBI were around 1,950 basis points over U.S. Treasuries compared with closing levels in New York Thursday of 1,077 basis points over U.S. Treasuries.
However, yield spreads on the EMBI have nearly doubled since Aug. 4, when they closed 656 basis points over U.S. Treasuries.
Analysts said those yield spreads were continuing to widen at a rapid rate.
Peter West, chief economist at BBV Securities, said: "In London trading today, we've seen a further massive widening in spreads on the Brady bonds."
He said the latest yield spreads on the EMBI had widened by roughly 170 basis points to 1250 basis points over U.S. Treasuries since last night's New York's closing levels.
"I think it (EMBI) will widen further over the next week or so and Russia is going to keep the markets pretty soft," added Portman.
Although the effective devaluation of the Russian ruble and the 90-day moratorium on the local Treasury bills earlier this week was the trigger for the mass exodus of capital, analysts said extreme bearish sentiment is now dominating the trend.
While the extremely low prices don't reflect the underlying economic fundamentals, analysts were loath to suggest when a recovery might occur.
"Recovery will be slow because so many investors have been hit by what has happened over the past few months in relation to Russia...that they are going to be wary about coming back in despite there being obvious bargain basement prices," Portman said. 
-- from staff and wire reports
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