The Big Idea

Latin America | Relative value trends

| August 12, 2022

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors. This material does not constitute research.

Recent performance across Latin American sovereigns suggests a rally with low conviction, perhaps the natural result of thin summer trading and uncertainty around the US economy. But some things have started to change. The Bahamas have moved up. Argentina has outperformed. Debt arguably trading below recovery value has drawn in investors. There is clear relative value across the region.

Things have started to shift after the strong consecutive gains with the illiquid off benchmark bonds, like the Bahamas, starting to catch up.  The high yielder relative performance is mostly on specific event risk with Argentina the outperformer on the positive spillover of economic management under Minister Massa. There is also a coincidental shift towards debt liability management to address what still appear as oversold bond prices amongst the high yielders. The historic low cash prices also provide an anchor with several credits still trading at or below historic low recovery value. These distressed valuations should remain supportive for the high yielders even after recent gains. The BB credit relative performance is more a function of supply risk ahead of the seasonal issuance while this credit category still provides a defensive investment strategy to immunize against the uncertain and opposing SPX/UST contagion.

The liquid BB benchmarks like DomRep have led the MTD total returns at 2.9% with its high beta status logically most sensitive to the rebound in external risk.  There has been a clear trend on relative performance via liquidity segmentation between the DomRep/Costar pair.  The outperformance has since stalled with Costa Rica starting to rebound after having traded 50bp inside COSTAR’45-DOMREP’49 in later June to now +50bps. The markets are now starting to arbitrage this spread premium that represents important technical support on the firm YTD trading range.

There are many parallels between Costar and DomRep with positive credit momentum and plans for new Eurobond issuance. DomRep is more opportunistic on the funding program while Costa Rica requires 2/3 congressional approval.  The pre-funding program should kick off this fall with net minimal issuance for Costa Rica on expectations of only small-sized approval just sufficient to fund the $1bn amortization in January 2023.  Costa Rica should also still benefit from its relative illiquidity versus DomRep. The BB rated (or aspiring BB) credits should continue to differentiate for their lower beta to external risk and the higher carry relative to the UST sensitivity of the investment grade credits.

There has been coincidentally a shift towards debt liability of the B-rated credits with a proactive strategy to not necessarily target savings as much as lower the credit risk premium (and secondary shocks on financing and sentiment).  The prospects for debt liability are marginal for distressed credits that still need to prioritize near-term financing over medium-term savings.  However, small-sized transactions to capitalize on perceived price distortions are logical under the current market conditions.

El Salvador was the first to announce plans for a debt buyback of the 2023s and the 2025s to reinforce their commitment to pay and push back against the distressed market prices (that weighs on the country prestige and international reputation).  There have also been discussions in Argentina about debt liability but nothing overly realistic considering their inability to access USD and multiple priorities for USD demand (foremost FX reserve accumulation).  The Bahamas could be another contender for small-sized debt buybacks, especially after contracting Rothschild and the laggard underperformance of their bonds. El Salvador bonds jumped 20 points on the front end and 10 points on the back end, The commitment to repay should anchor the 2023s while the rest of the curve remains dependent upon the successful follow-through of the transaction with prices trailing off after the initial gains.

The relative performance has also been a function of relative liquidity with the Bahamas a laggard either for its off-benchmark status or the lost-in-translation after contracting Rothschild as a financial advisor. The illiquidity is a handicap for the lower rated B credits for the high vulnerability to unfavorable externals. The latest bounce this week was a predictable laggard rebound to reconverge with similar comps like Ecuador.   The initial underperformance is easier to blame on technicals with the markets ignoring the strong fiscal performance and recovery in tourism. The further gains remain dependent on external risk for a small open economy dependent upon favorable external trends.

Siobhan Morden
Santander Investment Securities
1 (212) 692-2539


U.S. Fixed Income Trading Commentary Disclaimer

This commentary has been prepared by the U.S. fixed income trading desk of Santander Investment Securities Inc. (together with its affiliates, “Santander”) for its institutional investor clients only, and may under no circumstances be redistributed beyond the recipient in whole or in part.  The recipient is an “institutional account” as defined in FINRA Rule 4512(c) that (i) is capable of evaluating investment risks independently, both in general and with regard to particular transactions and investment strategies and (ii) will exercise independent judgment in evaluating any potential investments and any recommendations of any broker-dealers.  For the avoidance of doubt, this commentary is not suitable for or intended for retail investors. 

This commentary has not been produced or reviewed by, and does not otherwise reflect the views or input of, the Research Department of Santander (“Santander Research”).  This commentary may conflict with the views of Santander Research, is not subject to all of the independence and disclosure standards applicable to research reports prepared for retail investors and is not independent from the interests of Santander.  Santander may have positions (long or short) in, effect transactions in or make markets in the subject securities (or related derivatives) mentioned in this commentary, and such positions or trading may be inconsistent with this commentary.  However, Santander is under no obligation to make a market in or otherwise provide liquidity in any security discussed herein.  This material may have been previously communicated to Santander’s trading desk.  Santander may have in the past or may in the future provide investment banking services (including underwriting activity and loans) or other services for the companies mentioned in this commentary.

This commentary has been provided for informational purposes only and is not a recommendation, offer or solicitation for the purchase or sale of any security or related instrument.  This communication is intended to be short term and brief in nature, and therefore does not provide a full analysis of any issuer or security or a sufficient basis upon which to base an investment decision.  The individual circumstances of the recipient’s investment objectives and needs have not been considered in this commentary, and nothing in this commentary constitutes investment, legal, accounting or tax advice or a representation that any investment strategy or service is suitable or appropriate to the recipient’s individual circumstances.  Information contained herein has been compiled from sources believed to be reliable, but no representation or warranty, express or implied, is made as to its accuracy or completeness.  The recipient should not rely on this commentary for any investment decision or other action, and Santander expressly disclaims any liability for any losses arising from any reliance on or otherwise related to this commentary.  This commentary reflects the personal views of the individual sender of such commentary, and no part of his or her individual compensation was, is or will be directly or indirectly related to its content.  This commentary is provided as of the date and time thereof, and Santander does not undertake any responsibility to update or revise any of the information contained herein, which may change without notice.  Past performance is not indicative of future results.

Fixed income securities, including those described herein, are subject to many risks, including, but not limited to, interest rate risk, the credit risk of the issuer, inflation risk, liquidity risk and risk of a downgrade by rating agencies.  Emerging markets investments are additionally subject to political, economic, legal, regulatory, market, settlement, execution, currency and other risks.  Fixed income, and specifically emerging markets, investments are not suitable for all investors. 

Santander Investment Securities Inc. is an SEC registered broker-dealer, FINRA member and SIPC member.  Santander Investment Securities Inc. is a direct, wholly-owned subsidiary of Santander Holdings USA Inc., which is a direct, wholly-owned subsidiary of Banco Santander, S.A

Siobhan Morden
1 (212) 692-2539

This material is intended only for institutional investors and does not carry all of the independence and disclosure standards of retail debt research reports. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.

This message, including any attachments or links contained herein, is subject to important disclaimers, conditions, and disclosures regarding Electronic Communications, which you can find at

Important Disclaimers

Copyright © 2024 Santander US Capital Markets LLC and its affiliates (“SCM”). All rights reserved. SCM is a member of FINRA and SIPC. This material is intended for limited distribution to institutions only and is not publicly available. Any unauthorized use or disclosure is prohibited.

In making this material available, SCM (i) is not providing any advice to the recipient, including, without limitation, any advice as to investment, legal, accounting, tax and financial matters, (ii) is not acting as an advisor or fiduciary in respect of the recipient, (iii) is not making any predictions or projections and (iv) intends that any recipient to which SCM has provided this material is an “institutional investor” (as defined under applicable law and regulation, including FINRA Rule 4512 and that this material will not be disseminated, in whole or part, to any third party by the recipient.

The author of this material is an economist, desk strategist or trader. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM or any of its affiliates may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.

This material (i) has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments or other financial instruments, (ii) is neither research, a “research report” as commonly understood under the securities laws and regulations promulgated thereunder nor the product of a research department, (iii) or parts thereof may have been obtained from various sources, the reliability of which has not been verified and cannot be guaranteed by SCM, (iv) should not be reproduced or disclosed to any other person, without SCM’s prior consent and (v) is not intended for distribution in any jurisdiction in which its distribution would be prohibited.

In connection with this material, SCM (i) makes no representation or warranties as to the appropriateness or reliance for use in any transaction or as to the permissibility or legality of any financial instrument in any jurisdiction, (ii) believes the information in this material to be reliable, has not independently verified such information and makes no representation, express or implied, with regard to the accuracy or completeness of such information, (iii) accepts no responsibility or liability as to any reliance placed, or investment decision made, on the basis of such information by the recipient and (iv) does not undertake, and disclaims any duty to undertake, to update or to revise the information contained in this material.

Unless otherwise stated, the views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the author, as of the date of publication of this material, and are subject to change without notice. The recipient of this material should make an independent evaluation of this information and make such other investigations as the recipient considers necessary (including obtaining independent financial advice), before transacting in any financial market or instrument discussed in or related to this material.

The Library

Search Articles