Emerging market debt on edge ahead of Tuesday's CPI numbers; Czech Republic prices €1.5 billion

By Reshmi Basu and Paul A. Harris

New York, June 14 - Spreads on emerging market debt widened ahead of Tuesday's morning report on U.S. consumer prices.

As the most watched inflation measure, the consumer price index will help clarify the timing and aggressiveness of a Fed rate hike, or so investors hope.

"We know the Fed is moving, but don't know when," commented a trader. "One day, the sentiment is that it will be a small increase. And the next day, no one knows."

Meanwhile in primary action, the Czech Republic priced an upsized €1.5 billion of 10-year notes (A1/A-/A-) at 99.772 to yield 12 basis points over mid-swaps,

A market source said the deal was upsized from €1.5 billion from €1 billion because the books were "heavily oversubscribed."

"The demand was high given its investment-grade ratings," said the market source. "And those are the only deals getting priced in this market."

The country's inaugural deal in the international capital markets priced at the tight end of guidance. Price guidance was set at a spread of mid-swaps plus 12 to 14 basis points.

Deutsche Bank Securities and Morgan Stanley ran the books for the Regulation S offering.

Also in primary action, Malaysia's Public Bank set price guidance for its $350 million 10-year subordinated notes (Baa1/BBB+) at a spread of 160 to 165 basis points over U.S. Treasuries.

Pricing is expected to take place Tuesday for the Regulation S deal via Barclays Capital and Citigroup.

From the same country, Malaysian International Shipping Corp. Bhd plans to roadshow a $1 billion offering of five- to 10-year bonds in two tranches starting Wednesday in Singapore.

The roadshow will move to Hong Kong on Thursday and then London on Friday. The U.S. roadshows will begin on June 21.

Barclays Capital and Citigroup are running the books.

Also adding to the pipeline Monday was Hong Kong's Road King Infrastructure Ltd. The company is considering a $150 million bond offering via HSBC Bank.

Road King is a Hong Kong-based company with businesses in the investment, development, operation and management of toll roads and other infrastructure projects in China.

And Export Import Bank of India is rumored to be exploring either a $300 million bond offering or loan.

Spreads wider

During Monday's session, emerging market debt spreads widened as investors waited for what could be a pointer to difficult times ahead in emerging market debt, the CPI numbers.

Trading was a little on the long part of the curve, said a Latin American strategist at Refco EM. "Not a lot of liquidity," he added.

Questions over how aggressively the U.S. Federal Reserve will act continue to perplex investors.

And that uncertainty pulled down Latin America. Brazil, Colombia and Mexico were all down in trading Monday. The Brazil bond due 2040 was off at one stage by 2¼ to 2½ points.

"It's still down over two points," said a sell-side source near the end of the afternoon.

"Turkey was off a fair amount in dollar price. It's not off quite so much in spread.

"In general everything is wider because of U.S. interest rate scares. Everybody is now worrying whether it will be a 25 or 50 basis point increase, and whether it will come in June or August.

"But people are concerned that the Fed is behind the curve."

The JP Morgan EMBI Index widened eight basis points to 502 basis points in late trading. The Brazilian component widened by 23 basis points. And Turkey's component of the EMBI widened by nine basis points.

Outflow slow down

Another market source told Prospect News on Monday that fund flow data released at the end of last week shows a slowdown in outflows from emerging market debt mutual funds. According to EmergingPortfolio.com, dedicated emerging markets funds underwent a $24 million outflow during the week that ended June 9 - the sixth consecutive week of outflows, but a lesser amount that the previous week's $105 million.

Weekly outflows averaged over $150 million during May, the source added - with the biggest being a $308 million outflow that occurred during the week that ended May 19.

"Overall we're hearing that the funds flow picture appears to be stabilizing," the source added. "However we heard more aggressive language from the Fed last week. And this week we're going to be hearing quite a bit of economic data. Those factors could have an impact going forward."

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.