Investors shun risk; EM spreads widen; eyes on Kazakhstan, Turkey, Greece; Lat-Am sees sellers

By Christine Van Dusen

Atlanta, Aug. 21 – Investors avoided risk as weakness continued for Asian assets on Friday – following disappointing economic data from China – amid concerns remained about the global economic picture and oil prices remained under pressure.

Also contributing to volatility on Friday was the evolving picture in Greece and the devaluation of Kazakhstan’s currency.

“Asian credits continued to sell off, with investment-grade cash closing 3 basis points to 8 bps wider,” a London-based trader said. “Very cautious tone, with most accounts either sidelined or trimming non-core risk.”

Some sellers were seen at the London open, and oil-related credits from China held in well, he said.

“Tensions between North and South Korea didn’t affect spreads much, with the sector performing in line with the market,” another trader said.

Ten-year notes from South Korea closed 3 bps to 5 bps wider, while the five-year notes moved out by about 2 bps and saw some buyers.

“India was quiet, but spreads are anywhere from 5 bps to 10 bps wider,” he said. “In Malaysia there was good two-way, with the [Petroliam Nasional Bhd. (Petronas)] curve 5 bps wider.”

Petronas’ 2019 bonds traded at 130 bps after being sighted at 135 bps.

Other emerging markets bonds traded “fairly well, given the weakness in Asia,” another London-based trader said. “Taking a step back and looking at spreads, they’re testing December wides – when the growth scare was at the forefront – which makes me think the risk-reward is fairly appealing here.”

He suggests picking credits with strong fundamentals that are likely to “weather the storm,” he said.

Slow trading for Peru

Activity for bonds from Peru was slow on Friday, a trader said.

“Spreads still leaking wider and cash prices are soft,” he said.

The sovereign’s new issue – $1.25 billion 4 1/8% notes due 2027 that priced Tuesday at 99.766 to yield 4.15%, or Treasuries plus 195 bps – traded at par bid, 100½ offered on Friday morning.

Earlier in the week the notes were seen trading between 100 1/8 and 100 5/8, then moved to 100.20.

Citigroup and JPMorgan were the bookrunners for the Securities and Exchange Commission-registered deal.

Asian bonds suffer

Asian bonds weakened considerably as Friday’s session wore on, another trader said, as investors remained reluctant to add risk and oil prices continued to fall.

“Liquidity was sluggish today, and banks, auto and tech continue to leak wider,” he said.

Sovereigns saw some “bottom-fishing,” particularly for 10-year notes from Indonesia and the long end for Philippines.

“High yield had a soft session, moving 50 cents to 75 cents lower,” he said. “Decent pullback after a strong summer in the high-yield space, as beta names fell 2 points to 2½ points in the last few sessions.”

Lat-Am in focus

The curve for Chile’s bonds remained “extraordinarily steep” on Friday, another trader said.

“The only trading is happening on the 2025s, which are trading at less than half the z-spread of the 2042s,” he said.

Short-dated bonds from Brazil were well-offered during the session, another trader said.

“We continue to see selling,” he said.

And Mexico’s bonds faced “appalling liquidity,” a trader said. “Hard to say where anything is, particularly in the long end.”

Credit default swaps spreads continued to trade well for Mexico, moving about 1 bp wider on Friday morning.

Sellers prevail for Lat-Am

In the afternoon, Latin American bonds saw a little bit of buying, another trader said.

“But the overwhelming majority of flows are still sellers,” he said.

Brazil’s five-year credit default swaps spreads moved to 346 bps from 329 bps, while Mexico’s moved to 155 bps from 148 bps.

“Cash prices also continue the move lower, as the Treasury rally does nothing to prop up levels,” another trader said. “Thin liquidity on a summer Friday also made it difficult to navigate prices.”

Bonds from Venezuela and PDVSA were mostly unchanged and Argentina’s weakened, he said.

“Hopes remain that we can carve out some kind of a bottom in commodities and risk assets so that market sentiment can turn around, although the trend continues to be wider and lower,” he said.

Kazakhstan currency rebounds

The news that the government in Greece would call for early elections, to take place on Sept. 20, “took a toll on Greek assets,” according to a report from Schildershoven Finance BV.

From Kazakhstan, the currency slightly rebounded into the end of the week after falling on the news that the sovereign was allowing its currency exchange rate to float overnight, a move seen as a response to China’s recent devaluation of its currency.

“However the risk of further devaluation persists, as the tenge rate is more sensitive now to oil price moves,” the report said. “On the other hand, we would like to note that after the recent correction, Kazakh sovereign euro bonds look quite attractive, especially the issue due in 2025.”

Turkey bonds get a bid

Looking to Turkey, long-dated sovereign paper got a lift, leaving the bonds firmly bid on Friday morning, he said.

“The macro environment is still a net positive for Turkey, and in true EM style eventually we will muddle through the political situation,” he said. “I agree that the fiscal target may slip and structural reforms will be left on the back burner.”

But it’s still a “functional market,” he said, given that so many other emerging markets – like Brazil, Russia and Africa are suffering so much during the rout in commodities.

Corporate paper from Turkey tracked the sovereign, but buyers were seen for some paper at the lows, he said.

Everbright trades, gets orders

The new issue of notes that China Everbright Bank Ltd. priced on Thursday – $450 million 2 7/8% notes due 2018 at 99.789 to yield 2.949%, or Treasuries plus 195 bps – ticked up in trading on Friday morning, a trader said.

BOC International, China Everbright Securities, Standard Chartered, Wing Lung Bank, CMB International Securities, ICBC and OCBC were the bookrunners for the Regulation S deal.

The final book was $1.9 billion from 87 accounts.

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