Emerging market debt left without a pulse; EM inflows at just $2.74 million

By Reshmi Basu and Paul A. Harris

New York, April 28 - Emerging market debt declined Thursday in response to U.S. economic data, which signaled a stalling economy as well as adding to inflation jitters.

Meanwhile in the primary market, multilateral regional bank Corporacion Andina de Fomento (CAF) priced $250 million of 10-year bonds (A2/A) at 99.992 to yield 5.126% or 95 basis points more than Treasuries.

Merrill Lynch was the bookrunner for the deal.

EM spreads blow out

But overall the market was pronounced dead by a sellside source.

"All of the EM markets have been shut off," because "people do not know what to do," he said.

Emerging markets was not amused by Thursday's release of gross domestic product in the United States, which showed slower growth.

The U.S. economy expanded at a 3.1% seasonally adjusted annual rate in the first quarter of this year, the slowest growth in two years, according to the Commerce Department. In addition, the GDP deflator came in at 3.2%, higher than expected.

"People didn't like what they saw," because the data translates into higher U.S. interest rates, added the sellside source.

The Federal Reserve now faces a dilemma when it meets next Tuesday. Growth appears to be de-accelerating while inflation seems to be on the rise, said sources.

"There are really two ways the GDP number will hurt EM," said an emerging market analyst.

"The first is the obvious one - slower than expected GDP growth will mean less demand in the U.S. for EM exports, which could really unsettle the export-driven recovery that EM has been enjoying.

"The second problem with the report was the higher than expected deflator number, which came at 3.2% annualized. Consensus was calling for the deflator to rise just 2.1%, he added.

"That means that the economy may be cooling somewhat, but price pressures remain a problem, which raises the prospect of the Fed continuing to hike rates even as the economy is slowing down.

"So EM could be hit with a double whammy - less demand from the developed countries for EM exports and tighter global liquidity conditions," he noted.

During Thursday's session, emerging market debt soured in response to the numbers. The Brazil C bond fell 0.313 to 99.437 bid while the bond due 2040 slid 0.85 to 112.85 bid. The Mexico bond due 2009 slipped 0.15 to 118¼ bid. The Venezuela bond due 2027 fell 0.95 to 97.90 bid.

Meanwhile, emerging market spreads blew out, according to the sellside source, speaking at late afternoon. He saw spreads for Brazil widen by 15 basis points. Spreads for Mexico and Colombia each widened by eight to 10 basis points, he said.

He added that Colombia outperformed the market, as Mexico's spreads are normally half of Colombia's.

And spreads for Russia widened by four basis points, he noted.

However, he added that Russia is a unique case because the country has large cash surpluses and is expected to repay Paris Club debt early.

Primary market shut down

The sellside source said that the GDP numbers "add volatility to any new supply in the next week."

"There was a rumor that Brazil would do a eurobond deal, but that was just a rumor."

He also remarked that the volatility in Turkey's paper and its currency would hurt the proposed issue by Vestel Electronics Finance Ltd.

Price guidance for $225 million of seven-year bonds (Ba3/B+/BB-) is at the Turkish sovereign due 2012 plus 125 to 150 basis points.

Credit Suisse First Boston and ABN Amro are running the Rule 144A/Regulation S issue of senior unsecured bonds.

Increased volatility has also impacted Mandra Forestry Finance Ltd. The company has downsized its pending offer of senior notes (B1/B) to $200 million maximum from $235 million.

Meanwhile the Hong Kong-based forestry company has reduced the tenor of the bond to eight-years from 10-years.

Morgan Stanley has the books for the Rule 144A/Regulation S offering.

Fund inflows at $2.74 million

Even flows into the market are in neutral. Emerging market bond funds had inflows of $2.74 million in the week ending April 28, according to EmergingPortfolio.com Fund Research.

Last week saw inflows of only $4.4 million, which leaves inflows year to date at $2.681 billion.

Global bond funds had inflows of $277 million in the week. These funds have had $6.258 billion of inflows year-to-date.

Ecuador down

In Ecuador, the new majority in congress is cleansing the political ranks, but the market impact is limited despite the political heat, according to a market source.

The congress continues to get rid of congressmen who were loyal to ex-president Lucio Gutierrez, and has so far suspended 11 legislators. The majority bloc said it would form a committee to investigate corruption charges against 10 additional congressmen. Also, congress is expected to fire four directors of the central bank.

The make-up of the central bank has little effect, given that its role is very limited, according to the market source.

Also the new economy minister Rafael Correa said he is committed to servicing the country's debt. He confirmed that excess oil revenues laws (FEIREP) would be changed so that 40% would be used for production or debt repurchase. This change in law would give the government the option, not the obligation, to buy back debt.

Nonetheless there is concern as to how the debt will be serviced. If the country taps into its FEIREP, then disbursements from multinationals may be at risk. Furthermore, it is unlikely that the new administration will able to keep up with social spending and government debt, according to the market source.

Ecuador bonds continued to slump. The Ecuador bond due 2012 fell 2 points to 91 bid while the bond due 2030 slid a point to 79 bid.

Argentina's exchange in limbo

On Wednesday, the 2nd U.S. Circuit Court of Appeals in New York adjourned before making a ruling on investor Kenneth Dart's request to freeze $7 billion of old bonds tendered for new debt as part of Argentina's $104 billion debt restructuring.

Argentina was to issue $35.3 billion in bonds in exchange for $62.3 billion in old defaulted bonds on April 1.

"They [Argentina] have to do something," said the sellside source.

If the exchange is not done, then there is a delay with the International Monetary Fund.

"There is $20 billion out there in holdouts," which is equal to the size of some countries' debt, he added.

As things stand, a court ruling could take from days to months to emerge.

© 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.