EM bonds end August on positive note; investors readying for new supply in September

By Christine Van Dusen

Atlanta, Aug. 31 - Emerging markets assets closed out the month of August on solid footing, with most bonds from the Middle East trading above par and notes from Ukraine performing well, as investors readied for a stream of supply in September.

The pump was primed by Federal Reserve chairman Ben Bernanke's remarks at the Friday symposium in Wyoming, where he supported further bond-buying to shore up the United States economy.

Some details were lacking; it remains to be seen whether this third round of quantitative easing will take place in September or as late as December.

But emerging markets investors and issuers were heartened.

"Solid effort again, all told, as we head into September," a London-based trader said. "The main excuses for not getting involved or doing anything are now over: the Olympics are done, Ramadan's done and generally the summer holidays are done. The market is readying and expecting supply."

There may be less supply than the market's expecting, though.

"Part of me thinks it may be less than everyone is hoping for," he said. "One thing for sure, though: the demand is there for the right name at the right price, and there is a huge opportunity still for issuers to bring long-dated paper as the duration bid still exists."

Though the primary market was quiet on Friday, market sources were whispering about a possible issue of notes from Russia's Alfa Bank and $1 billion of 10-year bonds from Brazil's Vale SA.

Gulf bonds trade above par

From the Middle East, only about seven bonds were trading below par on Friday, including Lebanon and Morocco's 2020s, as well as Egypt's 2040s, a trader said.

"And maturity-wise in 2012 and 2013 there are six maturing bonds in dollars and euros, and a few in dirhams," he said. "But net-net, it seems perfectly manageable, especially with names like First Gulf Bank's 2012s, RasGas Co. Ltd.' 2012s, Abu Dhabi National Energy Co.'s 2013s and Sabic Capital's 2013s."

Bonds from Gulf region banks were well bid on Friday, he said.

"Given the cash that exists in the area, and the fact their exposure to Europe is not high, they are well sought after," he said.

Dubai names stand out

Bonds from Dubai names traded well on Friday, with DPWorld a particular standout, closing 10 basis points tighter on the week and 20 bps on the month, a trader said.

"DPWorld's 2017s still offer decent value over the Dubai government's 2017s, but this has been the case for as long as I can recall," he said.

Emirates airline's 2016 notes were lagging somewhat, trading at 103.25 bid, 103.75 offered, or 3 bps wider on the month.

"But Jebel Ali Free Zone's 2019s are 20 bps better on the month, Majid al Futtaim Holdings' 2019s are 17 bps better on the month and Emaar Properties is holding well," the trader said. "They all feel OK."

Bahrain's 2022 bonds were quoted up at 103.50, about 30 bps better on the week and 60 bps better on the month. "A very solid effort indeed," he said.

Mixed performance from Qatar

Qatar bonds, meanwhile, were a mixed bag on Friday, a trader said.

"Qtel International trades a little on the heavy side," he said. "The sovereign paper holds fairly well and five-year credit default swaps remain 110 bid, 115 offered."

Notes from Abu Dhabi-based issuers put in a good session on Friday, with International Petroleum Investment Co.'s curve 15 bps to 25 bps tighter on the month.

"We have seen some profit-taking on IPIC's 2041s," he said, noting they last printed at 130.

And Mubadala's 2021 notes were 27 bps tighter on the month.

"The market is crying out for Abu Dhabi sovereign paper, but it's been crying for a few years now," he said. "The 2014s are totally gone."

Ukraine in focus

Eurobonds from Ukraine are showing strength in the face of market weakness, according to Svitlana Rusakova of Dragon Capital.

"Bids in sovereign debt adjusted a touch lower but did not get hit, and then decent offers were lifted as soon as a bounce came," she said. "The long end of the sovereign curve closed a quarter- to a half-point lower."

Ukraine's 2020 bonds were quoted at 93 bid, 94 offered, while its 2021 bonds were seen at 93.75 bid, 94.75 offered.

"Among corporates we saw demand for [Avangard] at 80 bid, 83 offered after the issuer published strong first-half 2012 results," Rusakova said.

This is typical for these bonds, given that "there is quite a bit of fear priced in and every piece of positive news triggers buying interest," she said.

MHP sees buyers

Ukrainian agricultural producer Mironovskiy Hleboproduct SA (MHP) attracted buyers and saw its bonds move to 98.75 bid, par offered after reporting on Wednesday an 83% net income increase for the second quarter.

"The metal and mining sector was very active, as some investors grew scared - deservedly - of plunging ore prices while others saw good value," she said.

In other trading on Friday, five-year credit default swaps were seen at 150 bid, 154 offered for South Africa. Ongoing demand was noted for Investec Ltd.'s 2017 bonds, trading Friday at 97.75 bid, 98.75 offered.

Caution on Indonesia

In taking a look at Indonesia, a market source warned investors to show some caution.

"We have turned more cautious on Indonesia and revise our stance to underweight from neutral," Barclays Capital said in another report. "We believe valuations are tight at current levels and risks of downside surprises from commodity exports are not insignificant."

The bank recommends buying sovereign bonds over quasi-sovereigns, because the quasi-sovereigns are trading tight to sovereign bonds.

And "in a risk-off scenario we would expect the spread differential to widen," the report said. "In addition, if market sentiment does not deteriorate, we believe supply will cap returns on the quasi sovereign."

Inflows rise

In other news, emerging markets bond funds saw their 12th straight week of inflows, with $445 million for the week ended Aug. 29, according to a report from data tracker EPFR Global.

"Flows into dedicated bond funds remain stable and continue to come in at a stable, although subdued, pace," according to a report from Barclays Capital.

The flows were "roughly three-to-one in favor of hard currency funds," said Cameron Brandt, director of research with EPFR.

"Investors responded warmly to talk of increased Chinese spending on infrastructure during the final week of August as they positioned themselves for further quantitative easing, inflation, disappointment, increased volatility or some combination of these elements while maintaining their search for yield," EPFR said in its report. "Yield hunger and concerns about Europe again shaped flows."

Year-to-date, emerging markets bond funds have seen inflows in excess of $32 billion.

Last week, the funds saw $426 million in inflows, with about $250 million going to funds with hard currency mandates.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.