EM bonds limp forward amid mixed news from euro zone leaders; TAQA remains a standout

By Christine Van Dusen

Atlanta, Dec. 9 - Emerging markets assets finished the week on a weaker note as end-of-year malaise began to set in and news from the summit of European Union leaders failed to offer great solace to concerned investors.

During the summit, leaders promised to increase lending to central banks and start the permanent bailout program in July 2012, a year earlier than originally anticipated. At the same time, E.U. officials seem to be rejecting the idea of boosting a bond-buying program to bail out debt-saddled sovereigns.

"With the ECB not showing the money and not actually buying bonds in the open market, credit is back on the defensive," a trader said on Friday. "Throw in some curveballs of political uncertainty in Russia, Turkey dealing with Iran and Syria, and data from China coming in weak, and you have a toxic brew. Be thankful for retail investors, though, whose determination to keep buying is keeping a bid to many names."

Still, spreads widened on Friday. The Markit iTraxx SovX spread was wider by 9 basis points. Bonds from the Middle East and North Africa outperformed somewhat but lagged the U.S. Treasuries bid and were 5 bps to 10 bps wider.

"This market is limping across the finish line," a trader said. "It's a very quiet end to the week, and while liquidity remains OK in International Petroleum Investment Co., Qatar and the Abu Dhabi National Energy Co. (TAQA) curves, many other market names have almost checked out of the game for the year. I expect a couple more days of some semblance of liquidity next week and then that might just be about that. Off-the-run bonds will continue to disappear into the Christmas illiquidity haze."

VEB's bonds suffer

On Friday, bonds from Russia's VEB Finance plc took a beating following the earlier news that the unit of lender Vnesheconombank was delaying its issue of benchmark-sized notes due December 2016 for undisclosed reasons.

The issuer had set price talk for the deal at the 5 5/8% area.

"The VEB curve has been pummeled 50 bps wider since the deal was pulled, versus just 30 bps for the rest of the banks," a trader said.

Russian corporates weaken

Other Russian corporate bonds were weaker in line with broader markets on Friday, though they weren't selling off very aggressively.

"Lukoil's 2020s and 2022s were hit early on at levels almost flat to Gazprom's, but quotes now came back to more reasonable levels," a trader said. "The oil and gas sector is marginally underperforming versus metals and mining so far."

Looking to Turkey, retail investors continued to show demand for bank bonds.

"Yapi Kredi, Akbank's 2015s and Isbank saw better buying," he said. "The sovereign curve steepened toward the end of the day as long-end paper got hit on the Street."

TAQA's 2021 outperform

The week's star performer in the secondary market was the recent issue of notes from Abu Dhabi's TAQA, which continued to see huge demand from retail investors.

The $1.5 billion two-tranche issue of notes due 2017 and 2021 were priced Dec. 5 via bookrunners Bank of America Merrill Lynch, Mitsubishi UFJ Securities, RBS and Standard Chartered in a Rule 144A and Regulation S transaction.

The deal included $750 million 4 1/8% notes due 2017 that priced at 99.502 to yield 4.233%. The deal also included $750 million 5 7/8% notes due 2021 that priced at 99.515 to yield 5.94%.

"TAQA announced today that they have bought back $589 million of their 2012s," a trader said. "The 2021s versus launch closed 20 bps tighter, and the 2017s closed unchanged, spread-wise."

The 2021s "have a good feel to them," he said. "They just printed at 101.25."

Bursan Bank plans

In deal-related news, South Korea's Busan Bank is planning a dollar-denominated bond offering for early 2012, a market source said.

No other details were immediately available on Friday.

Busan Bank is a lender based in Busan, South Korea.

EM bond funds see inflows

Emerging markets bond funds saw net inflows of $163 million for the week ended Dec. 7, according to a report from data tracker EPFR Global.

That compares to outflows of $725 million for the previous week.

"While the fate of the euro zone dominated headlines around the world in early December, investors were making year-end adjustments to their portfolios that included modest nods to the warming trend evident in U.S. macroeconomic data," according to EPFR's report.

Of the inflows into EM bond funds, $134 million went into hard currency funds and $84 million into local currency funds.

"Redemptions from blend funds make up the balance," said Cameron Brandt, senior analyst with EPFR.

Local currency funds had their best week since the last week of October.

"The latest flows suggest that investors weren't exactly expecting euro zone policymakers would have fixed everything by the weekend," said Brad Durham, EPFR's global managing director. "But they are showing more faith in the resilience of the U.S. economy relative to Europe."

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