Emerging markets drifts up during erratic session; funds see inflows of $249 million

By Reshmi Basu and Paul A. Harris

New York, May 12 - Emerging market debt inched higher Thursday during an erratic session as it tracked a downtrodden U.S. equities market for part of the session and ultimately managed to end better.

"It was kind of a mixed day today [Thursday]," said a trader. "It traded a little bit better in the morning, but couldn't ever sustain a rally or couldn't sustain a sell-off.

"It's been kind of chopping around all day long," he added.

But the trader remarked that emerging market debt held its own, despite another triple-digit slide for equities. The Dow Jones Industrial Average closed down 110.77 points at 10,198.48.

"We were tracking equities for awhile," he said.

"They [equities] were up in the morning and then they trailed off but it's kind of stabilized here.

"The equity market continues to crumble today [Thursday] but bids are holding in here - Brazil, Colombia - all across Latin America," commented the trader.

By the time trading wrapped up for the day, emerging market debt was mostly higher Thursday. The JP Morgan EMBI+ Index was up 0.03% while its spread to Treasuries tightened three basis points to 381 basis points.

The Brazil C bond was down 0.062 to 100.562 bid while the bond due 2040 fell 0.20 to 114 bid. The Colombia bond due 2012 slipped 0.05 to 111 bid. The Russia bond due 2030 added 0.18 to 106.93 bid.

Fund inflows at $249 million

Mutual funds saw a healthy positive flow this week after last week's modest outflow of $7.9 million. Emerging market bond funds had inflows of $249 million during the week ending May 11, according to EmergingPortfolio.com Fund Research.

These funds now have $2.922 billion of inflows year-to-date.

Global bond funds had inflows of $347 million this week. These funds have had $6.692 billion of inflows year-to-date.

Meanwhile, EmergingPortfolio.com Fund Research reported that high-yield bond funds saw outflows.

EM outperforms junk

One market source said that emerging markets continues to be well bid, given the underlying strong technical tone.

"When you have a bit of a sell-off, it produces buyers," he said.

Moreover, emerging market debt has been resilient as it outperforms high-yield and high-grade, said the trader.

"There hasn't been a huge sell-off" in emerging markets," said the trader.

"Corporate high-grade markets keep widening, we keep holding in there," he remarked.

Nonetheless emerging market investors are focused on the news in both high-grade and high-yield markets, said the market source.

"More than anything, it's [EM] watching Ford, GM news and how that affects investment-grade bonds," he said.

"The EM market, in a lot of respects, is watching high-grade and high-yield for sort of relative value cues.

"Emerging markets is probably the healthiest of the three because we went through a sell-off much earlier than either of those two markets has.

"And it has stabilized and performed very well. But at the same time as those two markets sell-off, people are cognizant of what the relative value of double-B emerging markets is versus double-B high-yield market," the market source told Prospect News.

Nonetheless, the trader is not completely sure whether the outperformance of emerging markets will benefit investors.

"It can be taken two ways. It could be seen as safe haven opportunity for investors to go because it hasn't gone down with all the stuff that has been going on around here," he noted.

"But other people can see it going other way - we're due to fall just as every other credit has fallen."

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