Emerging market debt trades higher; Asian corporates add to pipeline

By Reshmi Basu and Paul A. Harris

New York, June 7 - Emerging market debt traded up as a wave of cautious optimism hit the market Monday.

"People are a little more upbeat," said a trader. "People oversold and are now looking to get back into the market.

"Investors are more confident that the Fed won't shock the market," he added.

Meanwhile in primary action, Asian corporates such as Oversea-Chinese Banking and Industrial Bank of Korea are expected to price this week ahead to take advantage of low interest rates ahead of the U.S. Federal Reserve meeting in late June.

Singapore's third largest lending institution Oversea-Chinese Banking Corp. Ltd. set price guidance for its planned $500 million three-year senior unsecured floating-rate notes (Aa3/A/A+) in the area of 12.5 basis points over Libor.

Deutsche Bank Securities and Citigroup are the joint bookrunners for the Regulation S deal.

Pricing is expected at the end of the week.

Also adding to the Asian pipeline is Industrial Bank of Korea. The issuer is expected to price its $200 million 10-year notes (Baa1/BBB) early this week.

Deutsche Bank Securities and UBS Securities are running the books for the Regulation S bond offering.

And Indian Railway Finance Corp is sending out requests for proposals on a planned $200 million offering of five- to seven-year floating-rate notes.

Indian Railway Finance is the financing vehicle for state-owned Indian Railway.

And from Mexico, Pemex Project Funding's $1 billion of six-year floating-rate notes is talked at three-month Libor plus 130 to 135 basis points.

The deal is expected to price on Tuesday.

HSBC and Lehman Brothers are running the books.

Confidence returns to market

Across the spectrum, paper was firmer during Monday's session. The JP Morgan EMBI Index was up 0.68% during Monday's session. Its spread to Treasuries tightened by 15 basis points to 478 basis points.

"It performed very well," said Enrique Alvarez, Latin American debt strategist for research firm IDEAglobal.

"High beta credits did particularly well.

"Brazil was up across the board. On the long end, it was up at least two points," he added.

The Brazil bonds due 2040 tightened by 23 basis points, ending at 93 bid, 93.50 offered. The Brazil C bonds tightened by 32 basis points, ending at 91.0625 bid, 91.1875 offered.

"Everything is up. Brazil is up pretty big. The whole curve is up from 20-40 basis points," said a second trader.

Colombia and Ecuador also finished Monday with strong performances. Colombia bonds were up 1.5 points. And Ecuador bonds rose three points.

"It's a phenomenon across all asset classes," said the second trader. "When they like it they like it, and when they hate it they hate it.

"All the equity markets are up - the Dow, the Hang Seng, the Nikkei. This is just a day to go higher," added the second trader.

Investors appear ready to go back into the market as the interest rate fright becomes less scary.

"I think there's less risk aversion in the market," said Alvarez. "Oil has come off substantially." "People are less afraid to see the Fed raise rates in June," he added.

Now more and more investors believe that the Fed will raise rates by only a quarter percentage point at its late-June meeting. And beyond that, the Fed will implement a stepladder quarter point incremental approach.

"People who were thinking of a 50 basis point increase in June have basically discarded that idea," Alvarez told Prospect News.

This sentiment has allowed the return of some confidence into the market.

Also adding to cautious optimism is the strength found in local markets and the positive movements in local currencies, in particular Brazil.

"So all of these combinations of elements have apparently emboldened people to take further steps to the plate," said IDEAglobal's Alvarez.

And at some point, the good feelings will trickle down to issuers.

"As the market grows stronger, there are some countries out there in need of financing.

"I have no doubt that you will see them sooner than later," added Alvarez.

© 2015 Prospect News.
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