EM performs as Brexit fears resurface, but volumes stay light; Bank of China draws orders

By Christine Van Dusen

Atlanta, July 6 – Emerging markets bonds managed to perform on Wednesday following Tuesday’s more wary approach, which stemmed from continuing concerns about Brexit, the Italian banking crisis and upcoming economic data from the United States.

“Going into this morning, U.S. 10-years entered into sub-1.35% territory while the British pound has fallen to a 31-year low versus the U.S. dollar,” a trader said. “EM currencies are unsurprisingly opening weaker as well. [Emerging markets] credit, however, still performs very well in the current environment, with spreads only wider to match the rates move.”

That is because emerging markets is still perceived as sitting in a “sweet spot” for investors as they seek higher yields and developed markets see theirs drop, he said.

“With no doubt, the favorable backdrop can remain for longer, but we are also running the risk that we wake up one morning only to find out that the current fundamentals in EM do not warrant such low yields,” he said.

Though investors remained uncertain about the impact of Brexit, “the wall of cash created from quantitative easing the flight to safety looks like it’s going to continue for now,” another trader said. “With that backdrop the grind tighter in EM should continue as we track U.S. Treasuries to new highs, albeit with a small lag.”

The primary market is expected to remain mostly quiet, a trader said.

“Supply from Turkey [the Middle East and North Africa] for the next couple of months is expected to be close to zero,” he said. “Look to September time for the next wall of Middle East issuance.”

Lat-Am in focus

From Latin America, most names held in “pretty well” during the morning, a New York-based trader said, with most account bases resuming their buying and firm bids coming in for high-yield, high-grade and split-rated credits.

Still, volumes and inquiry remained slow.

“We continue to see very little selling across the credit spectrum and across account bases,” he said. “Even the continuous oil [move] lower has put hardly any pressure on related credits like [Colombia’s Ecopetrol SA], slightly lower this morning.”

Chile’s Cencosud SA, meanwhile, “continues to trade strongly after positive headlines yesterday,” he said, pointing to news that the company might bring on some strategic partners, which means the lender might eventually become an acquisition target.

“The 2023s and 2025s jumped one point yesterday after an almost one-point jump late last week, as the risk-on scenario in Latin America strengthened,” he said.

Bonds improve

By the end of the session, Latin American bonds had improved as equities and oil prices moved higher, another trader said.

Brazil’s five-year credit default swaps ended at 318 basis points from 322 bps, while Mexico’s moved to 152 bps from 158 bps.

“Cash prices continue to be firm, with a bit of weakness brought on by a turnaround in U.S. Treasuries, but this quickly dissipated as spreads tightened and Treasuries stabilized from intraday lows,” he said. “Latin American high-yield finishes mixed on the day, with Venezuela mostly unchanged, whereas Argentina was weaker.”

Venezuela’s 2027s closed at 48.50 from 48.35, PDVSA’s 2017s closed at 71.25 from 71, and Argentina’s Bonar 2024s closed at 116 from 116.25.

Argentina’s 2026s finished at 107.60 from 108.35, he said.

“Flows picked up today, with better buyers emerging late in the afternoon,” he said.

Green bonds see activity

Some trading activity was seen on Tuesday for Bank of China Ltd.’s new multi-tranche issue of notes due in 2018, 2019 and 2021 and denominated in dollars, euros and renminbi, a market source said.

The deal included $750 million floating-rate notes due July 12, 2018 that priced at par to yield Libor plus 100 bps. Those notes were spotted on Tuesday at par bid, 100.15 offered.

The $500 million 1 7/8% notes due July 12, 2018 priced at 99.93 to yield Treasuries plus 125 bps. The notes were trading Tuesday at par bid, 100.05 offered.

The $1 billion 2¼% notes due July 12, 2021 priced at 99.836 to yield Treasuries plus 135 bps. Those notes were seen Tuesday at par bid, 100.10 offered.

The €500 million ¾% notes due July 12, 2021 priced at 99.839 to yield mid-swaps plus 95 bps.

The bookrunners for the three tranches were Bank of China, BofA Merrill Lynch, Credit Agricole CIB, HSBC, BNP Paribas, China Construction Bank (Asia), Commerzbank, ING and SEB. The notes were bid at 99.60.

The RMB 1.5 billion 3.6% notes due July 12, 2018 priced at par to yield 3.6% via bookrunners Bank of China, Citigroup and Wells Fargo Securities.

The proceeds from all of the bonds will be used to fund green projects.

Yunnan trades

The new issue of notes from China’s Yunnan Metropolitan Construction Investment Group Co. Ltd. – $500 million 3 1/8% bonds due 2019 that priced Thursday at 99.586 to yield 3.271%, or Treasuries plus 260 bps – traded near reoffer on Wednesday, a market source said.

Citigroup and Guotai Junan International were the joint global coordinators and – with BOC International and Orient Securities – the bookrunners for the offering.

The final book was more than $900 million from 68 accounts, with Asian accounts buying 96% and Europe 4%. Fund managers and insurance accounts bought 45%, banks 30%, corporates 11% and private banks 14%.

The issuer is a developer and builder in Yunnan Province and based in Kunming.

© 2015 Prospect News.
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