Emerging market debt spooked by oil prices; funds sees $2.7 million inflow; $1.7 billion of new deals

By Reshmi Basu and Paul A. Harris

New York, July 13 - Emerging market debt turned skittish Thursday as the market focused its attention on record-high oil prices and escalating violence in the Middle East, which wreaked havoc on U.S. equities.

In other news, emerging market dedicated bond funds stopped a nine-week losing streak. Funds saw a modest $2.731 million of inflows for the week ending July 12, according to EmergingPortfolio.com Fund Research. This comes on the back of last week when $235 million exited the asset class.

Additionally, emerging market equities saw $1 billion of inflows for this week.

In the primary market, the asset class saw $1.725 billion of new supply.

In a drive-by deal, the Republic of El Salvador retapped its 7.65% bonds due 2035 to add $225 million.

The retap priced at 96.71 to yield 7.941%, or a spread of 275 basis points more than Treasuries.

Citigroup and JP Morgan ran the Rule 144A/Regulation S sale.

The additional bonds bring the total size of the issue to $1 billion.

Russian oil giant TNK-BP Finance SA sold an upsized offering of $1.5 billion in a two-part offering of global bonds (Baa2/BB+/BB+).

The deal, which was increased from $1 billion, includes a tranche of $500 million in five-year bonds and $1 billion in 10-year bonds.

The five-year bonds priced at 99.559 to yield a spread of 190 basis points more than Treasuries. The bonds priced near the tight end of guidance, which was set at 187.5 to 200 basis points.

Meanwhile the 10-year bonds priced at 99.626 to yield a spread of 245 basis points more than Treasuries. The bonds priced towards the wide end of talk, which was set at 237.5 to 250 basis points.

Credit Suisse and Citigroup were the bookrunners for the Rule 144A/Regulation S transaction. BNP Paribas and UBS were joint managers.

In other upcoming deal news, state oil company Petroleos Mexicanos SA de CV (Pemex) is looking to come with an international bond, but timing is uncertain at this point, according to a trader who focuses on Latin American names.

"They were in New York City talking to a bunch of banks," said the trader.

On Jan. 26, Pemex sold $1.5 billion in a retap of its bonds due 2015 and 2035. Pemex sold an additional $750 million of the bonds due 2015 at 98.889 to yield 5.89% and $750 million of the bonds due 2035 at 99.26 to yield 6.682%.

EM unsettled by oil, geopolitical unrest

Emerging market debt slid Wednesday on a host of worries such as historically high crude oil prices and a flare up in geopolitical tensions in the Middle East.

News of rocket attacks on Israel's third largest city of Haifa and the spike in oil prices created uneasiness among investors. Worries over Iran were also thrown into the mix as the market is concerned that the country might cut oil exports in retaliation for being referred to the UN Security Council over the dispute about its nuclear ambitions.

At session's end, oil closed at a record $76.70 a barrel. As a result, U.S. equities were slammed as the Dow Jones Industrial Average index tanked 166.89 points to close at 10.846.29, losing 1.5% on the day.

And as the Dow industrials saw triple-digit losses, emerging market debt saw a volatile session.

With such an unsupportive backdrop, emerging markets entered another round of risk reduction, observed market sources. Furthermore, the market is moving beyond its U.S. data dependency for direction, as oil prices become a key trigger.

"We're going back onto the global scenario where the scenario is very defensive and skittish due to the Middle East unrest and the inclusion of Iran in the equation," remarked Enrique Alvarez, Latin America debt strategist for think tank IDEAglobal.

He noted that high oil prices leave the market vulnerable because crude oil is now basically open to any type of shocks from the supply side or from weather.

That scenario means that oil can climb even higher, putting upward pressure on inflation, which would very likely have a direct consequence on federal monetary policy moving ahead, a negative for the emerging market asset class.

However, Thursday's session does not necessarily mean that the market will see the same type of risk reduction intensity that it saw throughout May and June.

The magnitude of such a sell-off will depend on how much more pressure international equity markets, such as emerging Asia and emerging Europe, see in the coming sessions.

Latin America down

In general, Latin American bonds were down Thursday, noted the trader quoted above,

He observed that benchmarks fell across the curve and noted that Colombia's peso-denominated bonds fell on the back of international interest rate concerns.

"Economists all over Wall Street expect a pause in rate hikes by year-end, but there is a lot of debate as to whether that's actually going to happen," noted the trader.

During the session, the spread on the Brazilian bond due 2040 was seen 10 to 13 basis points wider. The 2040 bond was at 124.80 bid, 125.30 offered.

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