Emerging markets debt sinks as bears return; Donbass sets talk; new Peru bonds gain

By Paul Deckelman and Aaron Hochman-Zimmerman

New York, July 20 - Emerging markets participants let their bearish instincts take over Friday, with most bond issues moving lower.

Vanished was the optimistic tone seen on Thursday, when the U.S. stock market rally that pushed the bellwether Dow Jones Industrial Average over 14,000 helped to encourage EM buying as well.

Instead, Friday's focus was on the continued problems of the subprime lending industry, which has spooked the credit markets worldwide, and which has sparked as "flight to safety," out of what is perceived to be risky asset classes, such as EM.

That helped to push U.S. Treasury bond prices up Friday and their yields down to the lowest levels since early June. That in turn sparked spread-widening in emerging debt, with the benchmark index measuring risk aversion seen at its highest level in nearly four months.

Risky high-beta credits like Venezuela, Argentina and Ecuador - usually the biggest gainers on days when the EM markets are up - were seen leading the losers on Friday.

One sovereign credit seen better, though was Peru's newly issued 2037 bonds.

On the corporate side, Brazilian airline bonds were seen continuing to come in, hurt by the ripple effect from the disastrous air crash earlier in the week in the Latin American nation in which nearly 200 people were killed.

In the primary market, terms from the Republic of Peru and talk from Industrial Union of Donbass (ISD) made the noise in emerging markets as many were just anxious for the week to end.

"It's definitely not pretty," said an emerging markets syndicate official about the market's condition over the past week.

The market stinks, people want the week to be over, another emerging markets syndicate official said.

If people think "the world is blowing up," investors may be holding their money and waiting for lower prices, the official added.

Peru prices on guidance

Late Thursday, the Republic of Peru sold 4.75 billion nuevo sols of 30-year bonds (Baa3/BBB-/BBB-) at par with a coupon of 6.9%.

The final deal amount was raised from the initial 3.2 billion nuevo sols and the yield came in line with guidance in the 6.9% area.

Citigroup had the books for the deal.

Proceeds from the sale will be used to fund a pre-payment of Paris Club debt.

ISD Donbass talks

Ukraine's Industrial Union of Donbass (ISD) released talk of 9% to 9¼% for its dollar-dominated senior notes (B1/B+).

Terms are expected early in the week of July 23.

JP Morgan and Citigroup will bring the deal to market.

Bernanke names a number

Concern over the subprime lending debacle helped to push Treasuries up in a flight-to-safety response after Federal Reserve chairman Ben Bernanke estimated in Congressional testimony Thursday that the credit losses associated with subprime mortgages are "fairly significant" - perhaps as much as $50 billion to $100 billion.

The yield on the benchmark 10-year U.S. government paper fell by 7 basis points to 4.95%, and at one point during the session shrank to 4.93% - the lowest levels seen since early June.

With Treasury yields down and EM yields rising as prices fell, the widely followed EMBI+ index compiled by JP Morgan & Co., which tracks the average spread between emerging debt on the one hand, and the U.S. issues on the other, was seen having widened out by as much as 10 bps intraday, before finishing off 7 bps wider at around 180 bps, the widest its been since mid-March.

Brad Durham, a managing director at Emerging Portfolio Fund Research Inc. in Cambridge, Mass., which tracks debt and equity fund flows and asset allocation worldwide, suggested that the jitters over the subprime situation - which have roiled the emerging markets as well as U.S. domestic markets and other markets internationally on an on-again, off-again basis for some months now - were back on the minds of investors in EM debt and other markets now in particular "possibly because Bernanke's comments nailing down a number . . . certainly gave it more concreteness."

However, he added that a more likely explanation was simply that "given the higher level of [market] volatility right now, I think there's a higher degree of jumpiness, and a fair amount of momentum trading as well."

EPFR noted in a news release that the EM bond funds " saw their 12 week winning streak come to an end as investors pulled $113 million out of these funds" in the latest week.

A shift to stocks?

Durham noted that EM was not alone - bond funds in general, including such categories as global, U.S. bonds and high yield, were hemorrhaging capital to the tune of hundreds of millions of dollar, while equity funds worldwide were fattening up. "Money is sloshing back and forth in large waves between different asset classes, and I think that subprime is right now a concern [because] the pundits, the TV journalists, are probably helping to stir the pot a little bit." He added that "it's one of those things where there's not enough certainty about the depths of the exposure."

With "investors just looking for some kind of a signal, one way or another, and Bernanke talking about actual numbers," that was enough to revive investors' subprime concerns, which had recently been seen to be subsiding.

Durham opined that while the subprime crisis seems to have again caught the interest of investors, just when it seemed safe to go back into the riskier market areas again, the reality is that "the risk has been pretty well dispersed, and is much better distributed among asset classes and within asset classes, " than it had been just a few years ago when risky investments in Russian debt led to the collapse of Long Term Capital Management, which in turn had a significant ripple effect throughout much of the debt market.

Local-currency surge cools a little

Durham said that looking at the individual EM debt funds which saw outflows, it was difficult to categorize particular areas of strength or weakness in geographical terms, or in terms of whether funds were investing in riskier, high-beta names - the Venezuela/Argentina/Ecuador troika, for instance - as opposed to more conservative credits.

But he did note the interesting phenomenon that "the fund with the third-largest outflow was a dedicated emerging markets local-currency fund" - a development "which is at odds with the recent trend of stronger inflows into emerging markets local-currency bonds and bond funds."

Recent analyses have shown that about two-thirds of the trading volume in EM bonds has been in securities denominated in local currencies, such as Brazil's real, Peru's sol, and the pesos issued by nations such as Mexico, Colombia and the Philippines, rather than in securities denominated in the traditional international reserve currencies such as the dollar, the euro and sterling.

It remains to be seen whether this was "just an isolated outflow from a single share class, or a single fund", the EPFR managing director said, "just a temporary reversal," or whether it might be the start of a trend to be watched.

Venezuela, Argentina, Ecuador down

Among the biggest losers Friday was Venezuela's debt, with its benchmark 9¼% dollar-denominated global bonds due 2027 quoted as having fallen nearly 1¼ points on the day to the 110 level, while the bonds yield jumped a dozen basis points to 8.22%.

Also finishing well on the downside were Argentina's bonds, seen lower some 1.56% on the day, and their spread versus Treasuries, on average, ballooned out by more than 20 bps to stand slightly north of 352 bps, its highest level in 10 months.

Ecuador's bonds were also seen taking a beating, its year-to-date returns seen down nearly an additional full percentage point on the session.

New Peru bonds better

One issue seen on the upside, however, was Peru's upsized issue of new 6.9% notes due 2037, 4.75 billion soles ($1.5 billion) of which were sold at par on Thursday, as Lima raised capital to repay debt ahead of schedule to its Paris Club creditors.

A buyside source saw those bonds having firmed smartly to 101 bid, in Friday's trading.

Brazil airline bonds lose altitude

On the corporate side, a trader said that amid a generally lackluster market, Brazilian airline bonds "seemed the hardest hit, even if only a touch."

That continued weakness seen on Thursday as the markets began reacting to the news of Tuesday's horrific Brazilian air disaster. Some 191 people were killed when a TAM Linhas Aereas jetliner overshot the runway while trying to land at busy Congonhas airport in Sao Paulo in a heavy rain.

He said that TAM - whose bonds had retreated a point Thursday - as well as rival carrier Gol Airlines's bonds were "both seeing plenty of sellers, each off about a full point today."

© 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.