Today's edition of the Saxo Morning Call features the SaxoStrats team discussing the continuing weakness of the US dollar as commodity prices recover ground and in the wake of key US equity indices hitting all-time highs Thursday.
Article / 08 July 2014 at 10:00 GMT

World Cup Bond Update: Down to the final four

Fixed Income trader / Saxo Bank
By Michael Boye

Tonight, its a clash of football giants, when hosts Brazil square off against Germany in the first semi-final of the World Cup. In bond markets, its top boy Germany who enjoys the better form. At the height of the Eurozone debt crisis, credit default swaps on its debt (proxy for country credit spread) briefly touched three-digit territory, but has since retraced all the way down to 20 basis points. Brazil, on the other hand, has been hit by the overall capital flight from Emerging Markets, that followed the announcement and later enforcement of QE tapering. 

The spread expansion between the two is evident in the corporate bond market. Of the biggest lenders respectively, Banco do Brasil offers USD CoCo bonds with a 9 percent yield to the 2024 call, and Deutsche Bank USD CoCo bonds offers a 5.8 percent yield to the 2020 call. While the latter features shorter duration and slightly better rating (BB versus B+ by S&P), Banco do Brasil has recorded significantly better profitability as measured by returns on equity for the past five years.

Similar relative opportunity is arguably available within the utility sector. Latin America's biggest power utility company Eletrobras (BBB- by S&P) offers a 4.2 percent yield on its 2019 USD bonds, which compares nicely to Germany's E.ON (A- by S&P) and its 2018 USD bonds offering a thin 1.9 percent yield.

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Brazil versus Germany


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