Emerging market debt up on "neutral" technicals; Brazil's new issue rebounds; $215 million inflows

By Reshmi Basu and Paul A. Harris

New York, Jan. 21 - Emerging market debt picked up speed Friday as buyers returned to the market on widening speculation that technicals were not so bad as had previously been thought.

The expectation of too much sovereign paper coupled with the fear that the market is headed into an environment without a "measured" pace of interest rate increases in the United States had dampened investors' spirits over the last couple of weeks.

But then JP Morgan reassured investors Thursday that technicals were not disastrous, which helped give momentum to trading that day, which carried into Friday's session, according to a trader.

"I hate to advocate it. But JP Morgan, at least in our space, continues to have a lot of sway over our market," he said.

"Yesterday [Thursday], Jonathan Bayliss [global head of quantitative strategy at JP Morgan] issued a report saying that the technicals have gone to neutral from bearish, which brought in a ton of buyers.

"And today [Friday] is a continuation of that. Today is probably some dealers left short yesterday and just a continuation of some of the buying," he commented.

JP Morgan said it saw external debt technicals as neutral based on factors such as reduced investor exposure, strong inflows and that new supply is having less of an effect than it has in the past.

Additionally, the stronger performance of the euro helped the market Friday, according to a buyside source.

"And every time you get a weaker day it kind of trades in that way - you get a little bit of weakening and then take that back a little bit.

"I think people just figured maybe they were too short or there was new money put to work in the market," noted the source.

Overall during Friday's session, bond prices were up as Brazil led the way. The Brazil C bond gained 0.562 to 101.812 bid while the bond due 2040 added 0.40 to 114.15 bid. The Ecuador bond due 2030 surged 1¾ points to 90 bid. The Russia bond due 2027 added 1/8 of a point to 103 bid. The Turkey bond due 2030 added ¾ point to 142 bid. The Venezuela bond due 2027 jumped 0.15 to 102¾ bid.

The JP Morgan EMBI+ Index rose 0.32% while its spread to U.S Treasuries tightened five basis points to 376 basis points.

Volume was high during the morning and began to wind down by the afternoon, typical for a Friday session, said the trader.

"Argentina has been high volume. Now, it's Friday afternoon, things have sort of quieted down.

"We've continued to see retail selling out of Europe and hedge funds and funds are buying all those positions," he remarked.

The Argentina bond due 2009 was down a point to 31¼ bid.

Brazil's new issue bounces back

On Thursday, a supply glut was avoided when Brazil tapped the euro market with a reasonably sized deal, according to a market source. The country priced a €500 million 10-year bond at a reoffer price of 98.80 to yield 7.55% and a spread of 398.5 basis points over the 10-year Bund.

The source added that the new euro deal had little impact on local markets.

While the offering was not initially well received, it did manage to make gains in the secondary on Friday.

"It ended up a little bit better," said the buyside source. Towards the end of trading, there was a two-hour short rally. The bond closed at 99¾ bid.

"It traded with the whole market - no reason in particular," said the source.

Inflows at $215 million

Emerging market bond funds had inflows of $215 million in the week ending Dec. 19, according to EmergingPortfolio.com Fund Research.

This year has started with three straight weeks of inflows, in which a total of $677 million has entered the market. The previous week had inflows of $249 million.

Global bond funds had inflows of $365 million in the week. These funds have had $694 million of inflows year-to-date.

Hanaro sets guidance

South Korea's Hanaro Telecom set initial guidance for its $500 million offering of seven-year bonds (Ba2) at 7¼% to 7½% via JP Morgan and UBS.

"I think in terms of what you can see in the U.S. for a comparable telecom, it's a decent pricing, but you have to take into consideration the Korean market.

"It looks like a decent pick up if it's a stable name," noted the buyside source.

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