EM risk appetite solid after Greece vote, but volumes, issuance muted ahead of holiday

By Christine Van Dusen

Atlanta, July 1 - Emerging markets assets started the new month on solid footing, with risk appetite still buoyed by the recent vote in Greece and real-money investors putting cash to work in liquid names.

But volumes remained light and new issuance quiet on Friday as Hong Kong and the Middle East were on holiday and investors prepared for the long Fourth of July weekend in the United States.

The JPMorgan Emerging Markets Bond Index Plus spread tightened 9 basis points to Treasuries plus 263 bps.

"With Greece dropping out of the headlines, risk remains modestly in vogue," according to a report from RBC Capital Markets.

Said a trader: "It's time to buy in earnest."

Among the names to get attention in the secondary market on Friday were the City of Kiev, Bank of Moscow, Kazakhstan's BTA Bank and South Africa's African Bank.

The primary market was largely silent, with just the Republic of Poland taking steps toward doing a new deal.

"The majority of the market seems to have packed up and gone," a trader said during the New York morning.

Poland sets mandate

Poland has mandated Daiwa Securities Capital Markets for an issue of Samurai bonds, according to an announcement from the sovereign.

The notes will carry a four-year maturity and are expected to launch soon.

Poland recently reopened its Japanese yen-denominated 3% notes due Jan. 26, 2026 to issue another ¥10 billion, increasing the issue size to ¥28 billion.

The reopening yield was 3%, the same as the original issue on Jan. 26, according to a news release.

Nomura International plc was the lead manager for the notes, which were issued under Poland's euro medium-term note program.

Wakala oversubscribed

In other deal-related news, the recent two-tranche issue of $2 billion notes due 2016 and 2021 from Wakala Global Sukuk Bhd., a special purpose vehicle of the government of Malaysia, was oversubscribed by 4.5 times, according to a news release from the government's finance ministry.

The deal included $1.2 billion 2.2991% notes due July 6, 2016 that came at a spread of Treasuries plus 145 bps and $800 million 4.646% notes due July 6, 2021 at Treasuries plus 165 bps.

Citigroup, HSBC, CIMB and Malayan Banking were the bookrunners for the global sukuk issue.

The deal attracted more than $9 billion of orders from 320 investors, the release said. About 29% were from the Middle East, 27% from Malaysia, 22% from the rest of Asia, 14% from Europe and 8% from the United States.

Kiev rises, then stalls

In trading, the new issue of $300 million 9 3/8% loan participation notes due 2016 from Kiev was seen Friday morning at 100.20 bid, 100.70 offered after pricing Thursday at par.

The notes - via Credit Suisse, Deutsche Bank, Vnesheconombank and VTB Capital in a Rule 144A and Regulation S transaction - priced at the tight end of talk, which was set at 9 3/8% to 9½%.

By Friday afternoon in London, the notes had "stalled" at 100.50, a trader said.

Bank of Moscow gets bailout

The Bank of Moscow, which received a $14 billion bailout, the largest rescue package ever seen in Russia, remained in focus on Friday after the lender was shown to hold $9 billion in problem assets.

"Bank of Moscow's senior bonds are another 30 bps tighter today," a trader said.

Also on Friday, Kazakhstan's BTA Bank confirmed that it would indeed pay interest on its debt.

"That's helping the 2018 dollar notes move up 1 point to 801/2," he said.

In trading from Turkey, the banks were performing on Friday with most of the interest coming from retail.

African Bank stands out

Looking to the African continent, South Africa was active, particularly on the corporate side, a trader said.

"African Bank is outperforming, now back at 99," he said.

The company's 6% 2016 notes priced June 10 at 99.796 to yield mid-swaps plus 425 bps in a Regulation S-only deal with bookrunners Credit Suisse, Goldman Sachs, Standard Chartered and Rand Merchant Bank.

"Nigeria has put in a stellar performance," he said.

The Middle East, meanwhile, stayed quiet due to the holiday.

"With the U.S. out on Monday we expect markets to shut down early," he said.

Inflows decline

Emerging markets bond funds saw net inflows of $534 billion during the week ended June 29, down from the previous week's $845 million, according to data tracker EPFR Global.

For this past week, about $472 million of the inflows went into funds with local currency mandates.

"Some of that is, I think, money rotated out of high-yield funds amidst the somewhat irrational exodus currently underway," said Cameron Brandt, senior analyst with EPFR.

"And the fact that monetary authorities in Brazil, China and India turned the screws again recently has bolstered confidence that inflation is not going to run away in key markets," he said.

Investors bullish, cautious

Overall, EM investors still remain structurally bullish but tactically cautious amid continued concern that the markets could be further destabilized by the euro zone crisis, according to a report from RBC Capital Markets.

Looking back over the first half of the year, local bond markets generated the strongest returns, with Latin America and emerging Europe, the Middle East and Africa outperforming Asia.

"EM external debt was second-best," RBC said. Latin America was the outperformer in that category.

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