Emerging markets assets gain from EU summit proposals; China's Avic, Cheung Kong set talk

By Christine Van Dusen

Atlanta, June 29 - Emerging markets assets posted solid gains on Friday after the first day of the E.U. summit yielded proposals that could help bail the European Union out of its economic crisis.

During the first day of the two-day summit, European leaders agreed to the use of the European Stability Mechanism to recapitalize banks and to stabilize markets for E.U. members.

"These measures are broadly in line with our expectations but exceeded the market's mean view because risks had been skewed to the downside," according to a report from Barclays Capital Markets. "There had been a significant probability that no agreement would be made at all. The moderate risk rally therefore seems justified."

The Markit iTraxx SovX index spread tightened by 20 basis points while the corporate-focused LUCI Crossover Index spread moved 40 bps tighter.

"So the end of another week, month, quarter and half, and we are ending on solid footing, with fresh dollar price highs set on plenty of bonds," a London-based trader said. "Technicals are still supportive. Redemptions this month continue to be ploughed into familiar names."

Some bonds are getting harder and harder to source and replace, he said.

"They are locked away and very tricky to locate," he said. "The Street obviously knows this, and time after time what seem like good levels to let go of paper soon turn into offside positions. Curves are easily dislocated and relative value, despite some glaring opportunities, doesn't perform."

The highlight of the week, a trader said, was the issuance of new paper from the Kingdom of Bahrain and Majid Al Futtaim Holding LLC.

The primary market was mostly quiet on Friday, with two Asian issuers - China-based Avic International Holdings and Hong Kong's Cheung Kong Holdings - setting price talk for planned deals.

"So July gives us Ramadan, the start of the Olympics, the July 4 holiday in the U.S. and summer holiday migration. Sounds like a broken record, but technicals and liquidity will continue to rule the roost," a trader said. "Supply and demand, supply and demand."

Avic, Cheung Kong set talk

For its planned deal, Avic set price talk at 4.85% to 5% for a benchmark-sized issue of three-year renminbi notes.

Development conglomerate Cheung Kong Holdings set price talk at 5 1/8% to 5 3/8% for its Hong Kong dollar-denominated issue of perpetual notes, a market source said.

The notes will be distributed under Regulation S.

Dubai notes 'sought after'

In trading from the Middle East, Dubai's 2022 bonds were seen at 106.875 during the week, while the recent notes from Dubai's Jebel Ali Free Zone (Jafza) were seen with a 105 handle.

"Even Dubai Islamic Bank is very well sought after," a trader said. "The move lower over the past few months on oil has been totally dismissed by the market in the region, a virtual non-event."

International Petroleum Investment Co.'s 2022 bonds printed at 110 on Friday, almost 30 bps tighter on the week.

"Paper from the region has had a superb run. All the names are sought after," he said. "I would imagine issuing long five-year bonds must look appealing to some."

Bahrain, Al Futtaim up

Bahrain's $1.5 billion 6 1/8% notes due 2022 that priced at 99.867 to yield mid-swaps plus 437.5 bps traded Friday at 100.50 bid, 100.65 offered after closing Thursday par bid, 100.20 offered.

"This is up 50 cents, which for a $1.5 billion issue is a sound effort," he said. "Bahrain, between the 2020s and 2022s, has $2.75 billion worth of paper out there.

The new $500 million issue of 5¼% notes due 2019 from Majid Al Futtaim - which priced Wednesday at par to yield mid-swaps plus 389.7 bps - opened at 100.55 bid, 100.85 offered on Friday, about 5 bps tighter.

The notes were later quoted as high as 101 on Friday.

"Given the bond is $500 million I think, over time, it will continue to perform as their sukuk did," a trader said.

Dar al-Arkan in focus

Overall for bonds in the Middle East, the next key date is July 16, when Dar al-Arkan's 2012 notes mature.

"This is a $1 billion issue and there's plenty suggesting their 2015s, only $450 million, can continue to tick along if this key hurdle is also navigated," he said.

In other trading on Friday, Saudi Electricity Co.'s 2017 notes opened at 100.87 bid, 101.37 offered, unchanged. The company's 2022 notes started the day at 104.50 bid, 105.25 offered after trading Thursday 104.25 bid, 105 offered.

South Africa's bonds were also in demand, a trader said.

"You don't mess with South Africa," he said. "The five-year is at 162 bid, 167 offered. These bonds are solid."

Bond funds see inflows

Emerging markets bond funds reported inflows of $671 million for the week ended June 27, according to a report from data tracker EPFR Global.

"Risk appetite among fixed income investors faltered during the second quarter," the report said. "But it was not extinguished as the hunger for yield kept money flowing into bond fund groups that have historically delivered higher returns."

The bulk of the funds - $538 million - went into emerging markets bond funds with a hard currency mandate.

During the previous week, emerging markets bond funds saw a total of $552 million in flows.

Petrobras: high liquidity

Taking a look at emerging markets bonds from Latin America, Petroleo Brasileiro SA (Petrobras) stands out, with trading volume more than twice as high as the next most-liquid name, Vale SA, according to a report from Barclays Capital.

"While some of this is due to the sheer amount of Petrobras debt outstanding, particularly following $7 billion of issuance in January, the issuer's liquidity is still high," the report said.

However, for most emerging markets corporates from the region liquidity is an issue.

"While EM corporates have bucked some of the pernicious trends affecting developed world credit markets to date, deteriorating liquidity is one trend they have not managed to avoid," Barclays said. "Lower liquidity is often cited as a justification for the spread premium associated with Latin American credit. Although this is true broadly across Latin America, our findings indicate that this component of the spread premium is less warranted for at least some of the liquid benchmark Latin American corporate issues."

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