Emerging market debt slips on technicals; Mexico to issue $1.5 billion of retail notes in U.S.

By Reshmi Basu and Paul A. Harris

New York, Feb. 15 - Emerging market dipped slightly during a quiet session following Friday's strong rally.

In other news, the United Mexican States said it plans to sell up to $1.5 billion of notes to individual investors in the United States, according to a prospectus filed with the Securities and Exchange Commission.

The notes will be offered periodically using Incapital's Internotes structure.

Joint lead managers are Incapital and Banc of America.

One source said it was a great idea because it was another way for Mexico to diversify its investor base.

"U.S. retail bond investors are generally very buy and hold in their behavior; they'll buy the bonds, sock them away in their accounts, and just wait for them to mature," according to an emerging market analyst.

"So with U.S. retail participation, Mexico should be able to generate more interest from less volatile investors.

"I don't see a lot of downside to the program, assuming they continue their long-term program of reducing their overall stock of external debt," he added.

EM prices eases

Monday's trading session was described as "quiet' by sources after Friday's roaring session. Last week Brazil announced that it would buy back up to $20 billion of external debt, igniting a sharp rally across the asset class. Brazil saw its spreads tighten by nearly 30 basis points as investors made a mad dash to cover short positions, remarked sources.

However, the rally was short lived as Monday's session saw debt prices ease on technicals.

At the end of the trading day, the Brazilian bond due 2040 was down 0.60 at 131.80 bid, 132 offered.

The Argentinean discount bond due 2033 was lower by 0.50 at 96.75 bid, 97 offered. But the Russian bond due 2030 rose 0.19 to 111.875 bid, 112.125 offered.

Fitch drops Indonesia outlook to stable

In other news, Fitch Ratings cut its outlook for Indonesia's sovereign credit ratings to stable from positive, citing risks to the country's external balance sheet.

There was no negative impact on the country's bonds, said a trader who focuses on Asian credits.

During the session, the Indonesian bond due 2016 added 0.13 to 103.875 bid, 104.875 offered while the bond due 2035 gained 0.50 to 113.25 bid, 114 offered.

Fitch Ratings on Monday also raised the outlook of the Republic of the Philippines to stable from negative.

The trader said that sovereign prices bounced back basically to the highs right before Friday's Treasury sell-off. He added that prices were slightly off the highs, but spreads were pretty much at the tights.

He described the bond movement as a "very impressive price action."

At session's end, the Philippine bond due 2031 was at 100.625 bid, 101.12 offered, up 0.12.

Lack of supply helping market

Record inflows have been credited with driving external debt spreads to historical lows. Last week saw a record-breaking volume of cash pour into the market. Dedicated funds saw $851.8 million of inflows, according to EmergingPortfolio.com Fund Research.

"I have been a little surprised. We were all expecting strong flows, but I think $851 million exceeded everyone's expectations," remarked the buyside source.

The number gives support to the market's positive technical story, bolstered by the lack of supply and strong inflows.

And Brazil's buyback adds more fuel to the technical story.

"Not only are sovereigns not issuing in dollars but in fact they are buying back their debt through liability management operations or quietly doing it in the market which is what Brazil has done," remarked the buyside source.

The country has already bought back $2.3 billion of external debt, of which $700 million was purchased in January alone.

"That [the] amount of supply is shrinking is even more [bullish] in the face of such strong inflows; I think the tone is fairly positive," noted the buyside source.

The source added that Monday's session was much more quiet as the "supply factor weighed itself out."

Meanwhile the trader described the Asian primary pipeline as dead.

"The calendar is non-existent. There is nothing going on in the Asian high-yield market right now. It's pathetic how quiet it is.

"And it's time, too. There seems to be a lot of demand, especially for long-end paper," he added.

© 2015 Prospect News.
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