Emerging market debt tightens, shrugs off equities dip

By Reshmi Basu and Paul A. Harris

New York, Aug. 9 - Emerging market debt saw spreads tighten Wednesday despite a disappointing performance in U.S. equities, which was triggered by concerns about possible slower global growth.

In the previous session, emerging markets were uninspired by the Federal Reserve's decision to pause for the first time after 17 consecutive rate hikes. Spreads were mostly unchanged for the day.

However on Wednesday, emerging market debt appeared to be a little more pleased with the Fed's lack of action, noted a trader.

But there was a bit of a reversal for financial markets during the session, which opened with a pretty good tone across most markets, but then backed down as the day progressed.

U.S. equities opened strongly, but then erased gains on concerns of an economic slowdown in the United States. The last hour of trading saw a sharp decline as oil prices topped $77 per barrel.

Subsequently, emerging market spreads somewhat mimicked the stock market's downturn, noted market sources.

"They were much tighter early in the session, but closed back toward unchanged and in some cases slightly wider," observed a trader who focuses on Asian fixed income.

"It was not a massive move, given how strongly everything has performed recently."

EM tightens

At session's end, spreads for the JP Morgan EMBI Global index were tighter by four basis points, as investors appeared unfazed by the global slowdown story, which haunted equities Wednesday.

The Brazilian component of the EMBI tightened by four basis points while Colombia came in by 11 basis points.

During the session, the benchmark Brazilian bond due 2040 added 0.45 to 129.85 bid, 129.90 offered. The Brazil 2040s were off close to half a point off of the intraday highs.

The Colombian bond due 2033 jumped 1.50 to 135 bid, 136 offered. The Ecuadorian bond due 2030 inched up 0.25 to 102.25 bid, 103.25 offered.

Elsewhere the Russian bond due 2030 was unchanged at 109.625 bid, 110 offered. The Turkish bond due 2030 gained 0.50 to 148.75 bid, 149 offered.

Meanwhile credit default swaps saw the most marked moves, observed the second trader.

The five-year Brazil CDS, which had tightened by as much as six or seven basis points during the session, ended the day unchanged.

In local market action, Argentinean fixed income instruments saw a muted performance. There were mostly flows from offshore account as local players continued to stand on the sidelines, according to a market source.

On the external front, the country's curve was up in trading. During the session, the discount bond due 2033 was up 0.25 to 97 bid, 97.40 offered.

In other news, Mexican financial markets saw a decent performance, taking their cue from Latin America but then gave up gains. The Mexican peso traded as high as 10.835 but then closed out the session unchanged from the opening. The stock market also tracked U.S. equities lower.

Mexico's bonds saw spreads narrow by two basis points. On a dollar-basis, the country's sovereign curve saw a mixed bag of trading.

During the session, the Mexican bond due 2026 gave up 0.15 to 154.60 bid, 155.60 offered while the bond due 2012 was up 0.05 to 108.10 bid. 108.50 offered.

Asian issues were steady for the session,

"With Asian securities, when the market is doing well you expect the long end of the curve to outperform. And equally, when the market corrects the long end will take the brunt. And that happened today [Wednesday]," the second trader replied.

The long end of the Philippines curve was as much as a quarter of a point to three-eighths of a point better on the day, but ended close to unchanged.

The Philippines bonds maturing in 2031 opened 100.75 bid, 101.25 offered. It closed at 100.875 bid, 101.375 offered.

However, the market's backtrack toward the end of the session should not be interpreted as bearish sentiment, noted a market source.

"The market is quite positive. There's just not a lot of upside left," he added.

The asset class has once again tightened to near all-time tights, following the sell-off that started in mid-May, triggered by a broad risk reduction mode across all instruments.

"With spreads under 200 [bps], the market is not cheap," remarked the source, adding that August typically sees the lightest trading volumes.

Furthermore, equity weakness may hold back the emerging markets, the trader commented.

"Equities really can't punch up higher. It looks as though it could be cresting, and failing to make the highs of earlier in the year.

"At the margin that is going to have an influence in holding EM back," he added.

Colombia reopens 12% TES bonds

In the primary market, the Republic of Colombia (Ba2/BB/BB) reopened its 12% global TES bonds due Oct. 22, 2015 to add $300 million equivalent via a modified Dutch auction. The issue priced at 115.789 for a yield of 9.35%.

Deutsche Bank and Morgan Stanley were the bookrunners for the transaction.

The issuance pipeline may see a little more action, given the overall positive market tone, noted the second trader.

The Fed is unlikely to take action, since there is not a lot of data leading up to the next meeting in September. Moreover, August will see good cash flow in terms of redemptions and coupon payments. And it has been pretty quiet.

"So once the market gets the market gets into a general direction, and you have cash flows that are supportive of that, it sets things up for a reasonable grind tighter," observed the second trader.

However spreads have tightened on that anticipated pause, so the upside from that story may have been squeezed out, but the environment is technically supportive right now.

"So it makes sense that people could be considering bringing new issues," he said.

Rumored deals include one from Indian bank ICICI, which is expected to introduce a dollar-denominated tier I deal via JP Morgan. That deal will most likely be Regulation S.

And Bank of India is supposedly coming with a dollar-denominated upper tier II deal.

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