Emerging markets sell off again; trading desks see low volumes; spreads wider on Treasuries

By Aaron Hochman-Zimmerman

New York, June 16 - Emerging markets slowly drifted wider on Tuesday as the day mimicked Monday's slow and weak session.

Investors felt as though the primary pipeline was still open, but a flailing equity market and a summer trading pace did not make for ripe conditions to price a deal.

Lithuania, which has issued talk in the 9½% area for its euro-denominated benchmark-sized five-year bonds, would have to wait.

At the trading desks, the Philippines saw a reversal in sentiment as investors re-examined the sovereign's need for financing.

The benchmark bonds due 2030 fell 1 point.

From the major markets, volatility continued its way past 30.00 by adding 1.87 to close at 32.68, according to the VIX index. The index is a common measure of market volatility.

As a sector, Treasury yields sank as emerging markets widened by 13 basis points to 440 bps, according to JPMorgan's EMBI+ index. The EMBI+ estimates the amount of extra yield investors will demand to hold assets in emerging market debt.

Emerging Europe a wash

Emerging Europe was going through "the usual to-ing and fro-ing," the trader said. "There's really nothing special."

The market began "a bit weaker to start with and bounced back," he said.

Without a great deal of enthusiasm, "it feels OK," he said.

Buying and selling has occurred "in pockets," he said. "It's not all one story anymore."

The majority of investors are not sure where they should be at the moment, he said.

"You get short and you get killed, but I don't know that I want to be long," he added.

The approach of summer has quieted the primary as well as the trading desks.

"There's no real talk about new issuance," he said about the corporate world, while the sovereign side waits for Lithuania.

Many of the key sovereigns were seen largely unchanged.

Turkey's government bonds due 2030 were quoted at 152½ bid, 153½ offered, while Ukraine's bonds due 2016 were seen at 67½ bid, 69½ offered.

Among the corporates, the new 9% Russian Agricultural Bank bonds due 2014 were stable all day at 101¾ bid, 101 7/8 offered.

BRIC leaders pave way forward

Leaders of the BRIC countries met in the Ural mountain city of Yekaterinburg, Russia, on Tuesday to discuss greater partnerships between their emerging economies.

Much of the discussion surrounded possible moves away from U.S. Treasuries and the dollar as the world's reserve currency.

"The existing set of reserve currencies, including the U.S. dollar, have failed to perform their functions," Russia president Dmitry Medvedev said.

Some reports indicated that the countries would do more to support each other in place of their reliance on the United States, while others noted stronger rhetoric than resolve to scrap the use of the dollar.

"It's just a bit of 'bash the Yanks' and go home and do nothing," a London-based trader said.

The meeting will not amount to much other than "putting a little pressure on the dollar," a New York-based trader said.

Still, "they are becoming a much more important factor," he said about the group of four.

The Russian bonds due 2030 were spotted at 99½ bid, 99 5/8 offered.

LatAm treads lightly lower

Latin America has remained "pretty news-light," a strategist said.

Trading has moved slowly and there has been an absence of progress on the deal from Brazil's Banco Cruzeiro do Sul.

Another strategist agreed.

The market has been "extremely quiet" with "better selling though," he said.

Investors "are not adding risk at these levels" and are "taking some chips off the table."

The fact that the Dow Jones Industrial Average has posted two negative days is "an excuse to sell," he said.

The market is taking a necessary break, but "I think we're going to have new issues coming into the market," he said, as "the secondary is making room."

In trading, Ecuador's 9 3/8% bonds continued to hold their high plateau at 72 bid, 73 offered.

Argentina's 8.28% discount bonds due 2033 were seen at 48 bid, 48½ offered, while Venezuela's 9¼% sovereigns due 2027 were quoted at 69 bid, 69½ offered.

Meanwhile, in Brazil the 11% Brazilian government bonds due 2040 were spotted at 128 bid, 128¼ offered.

Asia gets cautious

Asia was similarly quiet, but "it is wider though," a trader said, by nearly 10 bps from Monday's close.

"There's been a pick up in hedging activity," he said.

Investors are becoming more cautious as they are "putting shorts back on or taking off longs," he said.

The Philippines has been one of the hardest hit credits in the sector.

The easing of the long rally has refocused attention on Manila's budget needs.

"The market had been a little complacent," he said.

"They're supposed to," the trader said about a rumored samurai bond; "they are going to need to go back into the market."

The Philippine sovereign bonds due 2030 were lower by 1 point at 122½ bid, 123½ offered.

Indonesia's government bonds due 2019 were spotted at 124½ bid, 125½ offered.

Also, Pakistan's bonds were seen holding strength at 64 bid, 67 offered, while president Asif Ali Zardari met with India prime minister Manmohan Singh at the BRIC summit.

© 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.