EM credit expected to continue strong; Argentina underperforms, Ukraine outperforms

By Rebecca Melvin

New York, Jan. 31 – Emerging markets debt recovered on Wednesday from some profit taking early in the week, as market players anticipate ongoing strength after record new issuance and spread tightening in January, according to market sources.

“The market rallied today after a slight correction in the last couple of days,” a market source said, adding that there was no real change in market technical and sentiment is still good.

“You can’t have a straight line going up, there are going to be some corrections along the way,” the market source said.

Spurring the latest bobble was a spurt up in U.S. Treasury rates to over 2.7% for the 10-year benchmark note, and several items on the macroeconomic calendar like the U.S. Federal Open Market Committee Meeting and the state of the union speech following U.S. President Donald Trump’s first year in office.

A little uncertainty creeping up in terms of rates and what Trump and the Fed were going to do contributed to profit taking. But there has been no real change and the technicals are strong: there is a global search for yield and synchronized global growth that is supportive for emerging markets assets, a market source said.

As for the Fed, no rate change was made on Wednesday by policy makers, who will now see Jerome Powell transition into the role of chairman as Janet Yellen has concluded her term.

Getting expensive

The one problem ahead is that emerging market hard currency debt is expensive, and for dollar denominated debt, it’s going to get more expensive, a market source said. The same is not true for local currency debt. Nevertheless, after record issuance for emerging markets in January and decent performance for most issues post issue, the technicals are still said to be strong.

Record issuance

Emerging market debt saw record primary market activity in January. There is typically a surge in volume in January, but levels were even higher than expected, with about $75.8 billion of total emerging market debt, according to Prospect News’ data, including roughly $30 billion of sovereign debt coming to the market in January.

Argentina, bringing $9 billion of notes, and Oman, which brought $6.5 billion, were two notable issuers in terms of deal size. Other Gulf Cooperation Council countries of the Middle East also boosted volume levels. On Wednesday, Poland squeezed in a €1 billion deal of 8˝-year green bonds.

The Poland notes came with a 1 1/8% coupon at 99.776 to yield 1.153%, or mid-swaps plus 23 basis points, according to a market source. The order book was in excess of €3.4 billion, and pricing came at the tight end of guidance for a range of 23 bps to 25 bps over mid-swaps, which was revised during marketing from 25 bps to 30 bps, and down from initial talk in the mid-swaps plus 35 bps area.

The Regulation S notes were sold via bookrunners BNP Paribas, Citigroup (billing and delivery), Commerzbank, Societe Generale CIB and PKO Bank Polski SA.

Sovereign spreads tighter

There was some 15 bps of spread tightening on average in January for emerging market sovereign and quasi sovereign credits, a market source said.

That leaves the benchmark JPMorgan sovereign global diversified benchmark at 265 bps as of Jan. 30. Of the sovereign issuers, Argentina was an underperformer, likely due to the high volume of new paper as well as due to questions arising from the country’s central bank action to cut rates at the same time that inflation is a concern.

Last week, the central bank cut interest rates at a second consecutive meeting of its policy makers. That came after the sovereign increased its inflation target to 15% up from 10% and as President Mauricio Macri tries to deliver on promises to boost the economy.

“There are coherence problems,” a market source said.

A notable outperformer for the month was Ukraine. The sovereign has enjoyed strong growth compared to the last couple of years, and there have been no geopolitical conflicts. Meanwhile, Ukraine debt was very cheap to start with, a market source said.

Egypt, Ecuador and Brazil were also mentioned among outperformers for the month.

© 2015 Prospect News.
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