Investors who had been betting Senegal could skirt a default pivoted fast after the government said it will seek a "debt treatment" via an enhanced G20 Common Framework, to be paired with an IMF program totaling $2.2 billion. That shift led traders to assume losses are coming, especially on shorter-dated paper, and they started unloading positions.
The euro-denominated bond maturing in 2028 absorbed the biggest blow Tuesday. It sank by more than 8 cents per euro at one point before trimming the drop. Turnover in that note reached roughly $13.1 million, the highest in two weeks based on Bloomberg data compiled using Tuesday's closing levels. For comparability, Bloomberg shows the 2028 and 2037 euro notes in dollar values, and the dataset runs through Sept. 1.
The next wave of selling hit the dollar bond maturing in 2048, amid rising anxiety about payment of the Sept. 13 coupon. The short end had been buoyed by hopes of a holdout strategy through the next scheduled payment in March, but that mindset faded after the policy announcement.
Azimut Investments SA's Carlo Morelli, who serves as a senior portfolio manager, said the short end had reflected a "dragging their feet" view, with bondholders eyeing the next payment due in March. "Now the chances are the G20 framework will rework all eurobonds before March 27," he said. "So the bonds re-aligned to the recovery of the rest of the curve."
In March, $547 million comes due, covering both interest and principal. At Degroof Petercam Asset Management in Brussels, fund manager Hugo Verdiere said the proposed treatment points to no amortization. He called it a positive step that Senegal is addressing the problem before a "hard default" and with IMF support, but said too many unknowns remain to pin down recovery values.
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"This is particularly true of the Senegal 28s which could still receive better treatment, a better bond menu, than the back end," said Sebastian Vargas of Seaport Global Holdings LLC, where he serves as the global EM sovereign strategist.
Real-money investors that sold during the drop included Van Eck Associates Corp. "We used the short covering demand as an opportunity to reduce our position," said David Austerweil, the New York-based fund's deputy portfolio manager. He added that more detail is needed on Senegal's plan to join a "modified common framework debt treatment without any creditor taking a loss."
Bonds rebounded Wednesday, landing among emerging market leaders, but that bounce looked like short covering rather than fresh conviction on Senegal's outlook. Expect choppy trading as the plan takes shape. As Vargas put it, this market is being pushed around by real-money accounts that are generally underweight and by fast-money shorts still active. If you hold or follow Senegal risk, the near-term story is volatility while investors wait for clarity on the treatment and the September and March payments.