CentAm/Caribbean Buffeted by EM Storm

Central American and Caribbean sovereign debt lost 1.15% in July, taking them to a year-to-date return of 1.56%, according to Bear Stearns. This was less the 2.83% July loss in the LatAm component of the EMBI+, which tracks the bigger sovereigns, and proves that this region is still a relatively safe haven. However, the problem for investors trying to get out during the global storm is a lack of flow. “Liquidity in this sector has declined to very low levels, according to our trading desk,” says Bear, which is one of the few shops that makes markets in the region. “Investors, generally speaking, are not selling the smaller credits at times like these, but buying is also very muted. Indeed, CDS contracts may be more liquid than cash bonds, which is not common in the Central American and Caribbean credits,” adds Bear. The shop maintains that economic fundamentals are still solid, and blames the rout on hedge fund deleveraging and fear of redemptions among other things. “Credit trends in the emerging markets, including the Central American and Caribbean region are, in our view, unambiguously improving,” says the shop.