Small bounce for EM bonds after volatile week; Oschadbank, Belarus, BTA Bank snap back

By Christine Van Dusen

Atlanta, Aug. 11 - Emerging markets assets managed a small rally on Friday to end a week made tumultuous by the downgrade of the United States' debt rating, the continuing euro zone economic crisis, riots in London and general concern about the world's economic picture.

"After a jittery open, the mood is much more constructive," a London-based trader said.

Said another trader, it was "a pretty quiet end to a very eventful week. We had the sheer panic hour yesterday around lunchtime and, coupled with the stability in stocks, the market has been able to muster a relief rally today. It's been a wild week, though, with some significant moves in rates, currency and stocks."

The rally came courtesy of Thursday's speculation on a short-selling ban on bank stocks in four European countries, which led to a temporary squeeze, according to a report from Barclays Capital Markets.

"We would caution, however, that short-selling bans have proven ineffective in the past, tend not to address the real underlying issues in Europe, reduce liquidity and increase the related risk premiums," the report said. "The second factor behind the rally in risky assets was U.S. jobless claims surprising on the downside. This suggests to us ... that the U.S. economic data is set to improve, thus helping risk sentiment to find a bottom from which to recover."

In the rally, several bonds snapped back between 30 basis points and 50 bps on Friday, a trader said. On that list was Oschadbank's 2016s, Belarus' 2015s, Kazakhstan-based BTA Bank's 2018s and Dubai's 2014s.

"We definitely saw some selling down of risk this week, and should this continue next week, we may be reliant on the U.S. Treasury sell-off for the spread tightening," a trader said. "I think volatility will continue, although not to the extent we saw yesterday, I hope."

Ultimately, EM assets remain hostage to the global backdrop, another trader said.

"While there remains a lot of spread value in the Middle East and North Africa, and locals are generally better buyers, we will continue to be hostage to the global backdrop, which remains poor at best," he said. "Remember it's the full-blown summer holidays and Ramadan at the moment, so arguably there will be less supportive bids, if anything, from locals."

Gazprom, Turkey tighten

In trading on Friday, Russia's Gazprom was tighter by 20 bps to 30 bps while Turkey was tighter by 20 bps.

"But activity is also returning to names like BTA Bank's 2018s, which are now at 73 to 74," he said. "The Russian corporate sector, all of a sudden, has a deep bid, really just leaving Ukraine corporates as illiquid."

Abu Dhabi National Energy Co. ended the week well bid and supported, he said, and tied International Petroleum Investment Co.'s 2016s as "bond of the week," he said.

But higher-beta names took a beating. Kuwait-based Kipco's 2016s and 2020s were 100 bps wider on the week.

First Gulf trades up

Also from the Middle East, the recent issue of notes from Abu Dhabi's First Gulf Bank - 3.797% notes due 2016 that priced on July 26 at par - traded Friday at between 100.75 and 101.125, a trader said.

"It still holds in reasonably well, albeit the spread has moved out to 245 [bps]," he said. "Locals remain better buyers."

Looking to Lebanon, the sovereign's 2022 notes were seen at 99.70 bid, 100.20 offered on Friday after trading often on Thursday at par. The notes priced July 28 at 99.195.

"Spreads are obviously wider on the month by about 45 to 50 bps," he said. "We have seen some small international selling, but not much."

And from Africa, Cairo-based African Export-Import Bank's 2016s opened at 99.5 bid, 100.5 offered after pricing on July 20 at par.

Dubai, Qatar in focus

The five-year credit default swap spread for Dubai, which was panic-lifted on Thursday to 430 bps, closed Friday at 380 bps bid, 390 bps offered.

"We've seen better buyers of Dubai sovereign paper, closing 7 to 15 bps better on the day," he said. "There does remain decent refinance to be done in the next 12 to 18 months in Dubai, and I suspect that spooked a few investors yesterday."

A similar theme was seen in Qatar, he said.

"Qatar trades very well, with good demand sighted on long end Qatari assets, especially Qtel International and Qatari Diar," he said. "Abu Dhabi is a similar story."

Some bonds stand out

A number of bonds stood out as underperformers over the last month, a trader said.

"There are a few more, but here are the key bonds to have been really smacked," he said.

He pointed to Oschadbank's 2016s, which were trading at 94.5 bid, 96 offered after pricing on March 2 at par. Belarus' 2015s were seen at 84 bid, 85.5. Kazakhstan's BTA Bank saw its 2018 notes trading at 73 bid, 75 offered. And Dubai's 2014s were trading at 87.5 bid, 89.5 offered.

But other bonds managed to make up losses on Friday, including Russia-based Gazprom, which saw its 2022s trading at 105.5 bid, 106.5 offered. Ukraine's 2016s traded at 98.25 bid, 99 offered after pricing June 10 at par. Russia-based Naftogaz's 2014s were seen at 107 bid 107.75 offered. Russia-based Vimpelcom's 2022s traded at 94.25 bid, 95 offered after pricing at par on June 22. And Turkey's 2040s were seen at 107.5 bid, 108.5 offered.

Inflows drop

Emerging markets bond fund flows took a beating during the week ended Aug. 10, with hard currency funds reporting their worst week year to date, according to data tracker EPFR Global.

"The tug-of-war between hunger for yield and fear of risk evident among bond investors for much of 2011 swung decisively in favor of fear during early August," EPFR said in a report.

EM bond funds saw their 19-week inflows streak come to an abrupt halt "as redemptions from funds with hard and blend currency mandates offset modest inflows into local currency funds," the report said. "Asia continues to be the preferred region for investors while funds with an EMEA focus are beginning to suffer from the perceived risks of the euro zone debt crisis."

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