As the U.S. economy slows, bond buyers consider the risk high enough to demand a significant premium on the loans they make to Panama. Panama economy depends on a canal bustling with business, much of which is directly related to the U.S economy. As U.S. consumers tighten their purse strings there is less buying of consumer goods which means less shipping to the eastern ports of the U.S. from Asia. How will the numbers look that justify a canal expansion if the U.S. economy slips into a recession as the interest rates escalate?
Emerging-Market Yield Spreads Widen on U.S. Economic Slowdown
Jan. 11 (Bloomberg) — Emerging-market yield spreads widened as mounting losses on securities linked to subprime mortgages and slower profit growth in the U.S. led investors to shun all except the safest government debt.
The extra yield investors demand to own bonds of countries including Russia and Panama instead of Treasuries rose on speculation the economies of developing nations will sputter as their exports to the U.S. slow.
“Investors are on the sideline,” said David Spegel, head of emerging-markets strategy in New York at ING Bank NV. “We’re going to see further downside.”
The spread on emerging-market bonds over Treasuries widened 6 basis points, or 0.06 percentage point, to 2.57 percentage points at 4 p.m. in New York, according to JPMorgan Chase & Co.’s EMBI Plus index. Spreads on Russian dollar bonds widened 7 basis points to 1.63 percentage points and spreads on Panama’s bonds swelled 11 basis points to 2.09 percentage points.
The yield to the 2015 call date on Brazil’s 11 percent bonds due in 2040, one of the most widely traded emerging-market securities, was little changed at 5.34 percent, according to JPMorgan. The bond’s price held at 135.95 cents on the dollar.
U.S. growth concerns intensified today after the New York Times reported Merrill Lynch & Co., the third-largest U.S. securities firm, may write down $15 billion related to U.S. mortgage losses, almost twice its original forecast. Merrill spokeswoman Jessica Oppenheim declined to comment.
“There’s this concern that the losses that have occurred are going to impact the economy,” Spegel said. U.S.
Treasury Secretary Henry Paulson said the U.S. economy slowed “rather materially” at the end of 2007, and any stimulus package should be put into effect quickly. “Time will be of the essence,” Paulson said in interview on Bloomberg Television’s “Political Capital with Al Hunt” to be aired this weekend.
The risk of owning Venezuelan bonds increased today, according to Bloomberg data. Five-year credit-default swaps based on the country’s debt rose 4 basis points to 451 basis points. That means it costs about $451,000 to protect $10 million of the country’s debt from default.
Indonesia said today it sold $2 billion of bonds, paying the highest yield in two years, in a sign that other developing nations face increasing borrowing costs as they struggle to contain their deficits.
Indonesia sold $1 billion of 10-year debt to yield 6.95 percent, or 299 basis points more than U.S. Treasuries, according to an e-mail sent to investors by one of the arrangers. It sold $1 billion of 30-year securities to yield 7.75 percent, equivalent to 329 basis points more than U.S. government debt.
`Flurry of New Issuance’
The Philippines is preparing to sell $500 million worth of bonds in its first and only overseas debt sale for the year after getting central bank approval, acting Treasurer Roberto Tan said. The country will be the fifth emerging-market nation to sell debt this year, following Indonesia, Turkey, Mexico and Colombia.
The “flurry of new issuance” reflects “uncertainty regarding a potential deterioration in future borrowing conditions,” Elena Tulloch, an emerging-markets analyst at Merrill Lynch in New York, wrote in a report to clients today.