EM bonds in favor on slow U.S. economic growth; Renhe sets roadshow; Polkomtel plans notes

By Christine Van Dusen

Atlanta, Aug. 27 - As the U.S. economy remained in focus on Friday with new comments from Federal Reserve chairman Ben Bernanke and new consumer sentiment data, the appeal of emerging market debt - and the sense that it's not such a risky asset class these days - continued to grow.

Yields on 10- and 30-year Treasuries saw their biggest bounces since June, both up about 15 basis points by mid-afternoon. This followed Bernanke's remarks that while the U.S. economy isn't growing as fast as he would like, it's still growing, and if it contracts the Fed will take "unconventional measures" to address the problem.

The comments boosted investor confidence on Friday - and trumped news that consumer confidence rose less than expected - in not only U.S. assets but also emerging market debt, which as of late has been heralded as "edging toward safe-haven status," a market source said.

"I think EM takes its lead, and rightfully so, from the U.S.," an economic strategist said. "Obviously the emerging economies are dealing with a little bit of inflationary pressure here, and a lot of the regional economies in Asia have their currency pegged to the dollar or at least take cues from Federal Reserve policy. So what the Fed does to combat inflation or deflation, or spur growth in the U.S., matters to the EM universe."

So if the U.S. appears to be handling its economic woes adequately, "that bodes well for EM," he said. "What the Fed does boosts global confidence and thus makes EM investors more confident in EM markets."

EM inflows rise

Indeed, emerging market debt has taken on a rosier glow.

Inflows into emerging market bond funds rose to $1 billion for the week ended Aug. 25, up from a "relatively modest" $441 million the week before, said Cameron Brandt, global senior analyst with data tracker EPFR Global.

"I think the thing that's significant is that as people have gotten more nervous, flows into EM bond funds have picked up," he said. "I think the risk that people see in EM bonds is way, way down. It is one of the few areas where you can get a higher return for at least the perception of manageable risk."

Year to date, emerging market bond funds have taken in three times as much as at the same time in the previous year, he said. "So there's been a real sea change in the view of [this asset class]."

The money should "keep flowing" so long as there are no unexpected jolts to the market, he said.

Another market source agreed. "We don't see any obvious, major defaults looming across the major EM universe," he said. "I mean, 18 months out I could see Venezuela imploding with a large pop. But the landscape right now is pretty benign."

Said Brandt: "U.S. and European interest rates aren't going to go anywhere for the rest of the year, so the attraction of debt in those countries is going to continue to be at least a little bit depressed from that angle. So the odds favor continuing strong inflows into EM bond funds. But in this climate, who knows?"

Renhe, Polkomtel plan notes

Despite the favorable feelings about emerging market debt on Friday, trading remained thin and issuance light due to the summertime slowdown. Still, a few issuers did take steps toward the market.

China-based developer and operator of underground shopping centers Renhe Commercial Holdings Ltd. will begin a roadshow on Monday in Asia, Europe and the United States for a proposed issue of senior notes, according to a company announcement.

Bank of America Merrill Lynch, BOCI Asia Ltd. and UBS are the joint bookrunners for the Rule 144A and Regulation S deal.

And Poland-based mobile phone operator Polkomtel SA is planning a PLN-denominated issue of five-year fixed-rate notes, a market source said.

BNP Paribas and Unicredit Bank are the bookrunners for the Regulation S deal.

In other news, the total book for the $1 billion reopening of 6 5/8% notes due 2035 from Mexico City-based petroleum company Petroleos Mexicanos SAB de CV (Pemex) - which priced during the week at 108.339 to yield 5.975% - was more than $2.5 billion, a market source said.

The deal had taken the market by surprise, given that most issuers were waiting until after the summer to bring notes to market. But some sources said the Pemex move was driven by reverse inquiries, so it made good sense.

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