Tighter spreads, limited liquidity after U.S. holiday; more outflows from EM bond funds

By Christine Van Dusen

Atlanta, July 5 - Emerging markets assets wrapped up a busy week with a quiet post-holiday session on Friday that saw tighter spreads, limited liquidity and mostly positive investor sentiment.

"Quiet in our market, but slightly better tone overall with spreads 2 basis points to 5 bps tighter," a London-based analyst said.

The Markit iTraxx SovX CEEME ex-EU index on Friday moved to 226 bps over Treasuries, narrower by 16 bps from Wednesday. The Markit iTraxx Crossover index spread - seen Wednesday at 479.6 bps - moved in to 439.5 bps.

"Global factors - the direction of the UST and trend dollar strength - should continue to drive the level of EM asset prices in the coming weeks," according to a report from Barclays. "EM markets' performance will likely become differentiated based on which countries emerge as winners and losers in the ongoing rebalancing away from investment-driven Chinese demand and towards US and Chinese consumers."

In other news, emerging markets bond funds continued to see outflows during the week, with $956 million moving out, according to a report from EPFR Global.

"Emerging markets bond funds suffered net redemptions for the sixth straight week but saw the pace of outflows moderate to a fifth of the previous week's record-setting levels," EPFR said. "EM corporate bond funds, however, saw redemptions accelerate to their highest weekly total since the current financial crisis began. And China bond funds recorded another week of net outflows."

Of this week's total outflows from EM bond funds, most were from hard-currency funds.

"Surprisingly, investors continue to favor local-currency EM bond funds over their hard-currency equivalents even as they reduce their holdings of EM bond funds," according to a report from RBC Capital Markets. "This suggests retail investors have a relatively better view on future [emerging markets] performance."

Middle East in focus

From the Middle East, Emirates airline's 4½% 2025 notes were trading Friday between 90.37 and 91.37, a trader said.

Earlier in the week the notes were sighted between 92 and 94.

Bonds from Bahrain Telecommunications Co. were a bit heavy in trading on Friday, he said.

"Covered in the Street," he said.

Ukraine bonds tick down

In trading from Ukraine, sovereign bonds moved about 1½ points lower toward the end of the week, particularly on the long end of the curve, said Svitlana Rusakova of Dragon Capital.

Some selling was reported for State Export-Import Bank of Ukraine's (Ukreximbank) 2015s.

And a few trades were seen for Oschadbank and City of Kiev, she said.

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