EM spreads tighten amid weaker Treasuries, but give some on trade fears; Gulf supply eyed

By Rebecca Melvin

New York, Sept. 7 – Emerging markets debt spreads tightened early on Friday, benefiting from a move lower in U.S. Treasuries after the U.S. payrolls report; but gains were trimmed later in the session after U.S. President Donald Trump announced he is ready to impose tariffs on an additional $267 billion of Chinese goods.

The session’s initial tightening came after a rocky week in which weakness in emerging markets currencies spread from Argentina and Turkey to South Africa and Indonesia.

The initial rebound was credited to the move in U.S. Treasuries after the U.S. monthly jobs report revealed continuing strength in the U.S. labor market and increased the likelihood that the U.S. Federal Reserve will make two additional rate increases this year. The rebound was also attributed to the market having reached a pretty oversold level after the ongoing weakening related to U.S. dollar strength and concerns about indebted sovereigns and corporates facing debt service troubles given weakened local currencies. Argentina has seen a 50% depreciation in its peso this year so far.

Meanwhile, fears about trade conflicts with the United States are keeping emerging markets debt investors on alert. The additional tariffs threatened to be imposed by Trump are the largest yet by far. The administration also imposed $34 billion in tariffs in June and $16 billion in tariffs in August. China retaliated in kind with tariffs for the same amount of U.S. goods.

For the week, spreads on Turkey’s sovereign bonds are 30 basis points to 40 bps better, and South Africa struggled a bit to come back, but were 3 bps to 6 bps better on Friday, a London-based trader said.

“We’ve seen a decent bounce,” the trader said, attributing the move partially to the move lower in U.S. Treasuries, which pushed the yield on the benchmark 10-year Treasury to 2.94%.

The iShares J.P. Morgan US Dollar Emerging Markets Bond ETF was 105.88 early Friday, which was up 0.47, or 0.45%, on the day, but the ETF is still down 10% compared a year ago when it stood at 117.26 on Sept. 8, 2017.

New supply, which was not forthcoming this week, is anticipated next week from the Middle East Gulf Cooperation Council. There are four likely corporate deals on the calendar from the Gulf Cooperation Council, including those from Al Hilal Bank, Abu Dhabi Islamic Bank, Aldar Properties PJSC and Arab Petroleum Investments Corp., or Apicorp.

Al Hilal and ADIB held fixed-income investor meetings this past week in London and the Middle East for sukuk, or Islamic bonds. Aldar, the Abu Dhabi-based real estate company, announced the previous week that it intends to issue a sukuk. And Apicor has mandated banks to arrange a series of fixed-income investor meetings a five-year, U.S. dollar benchmark of notes.

But Oman has not mandated banks for a new issue. Instead, a deal for the National Bank of Oman SAOG is on the table, a London-based trader said.

“There was some confusion, or lines crossed in the press. But Oman came out and said it is not planning to issue new paper until 2019,” the trader said.

Also this past week, Papua New Guinea mandated banks and scheduled fixed-income investor meetings for a planned dollar-denominated benchmark of senior notes, and that deal could come as soon as next week.

© 2015 Prospect News.
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