EM investors cautious amid global uncertainty; Abu Dhabi, Lebanon trade up; Brazil eyed

By Christine Van Dusen

Atlanta, Sept. 14 - Risk aversion once again ruled the day for emerging markets investors and issuers, this time inspired by comments from China premier Wen Jiabao, who said the powerful sovereign would expand its investment in the European Union but did not say by how much.

The uncertainty sparked by these remarks was tempered only slightly on Wednesday by France's determination to "do whatever it takes" to bail out Greece.

"China could provide a 'helping hand,' but this would be much less than what some had hoped earlier in the week, namely that China might be prepared to be a large-scale buyer of European assets," RBC Capital Markets said in a report. "A poor Italian bond auction yesterday and Moody's downgrade of two French banks added to the gloom."

So spreads held in relatively well, but the market was very thin, with volumes dropping off during the afternoon, a trader said.

"The markets are thin, flaky and fickle," he said. "Liquidity is patchy, at best."

Said another trader: "It is a very thin market ... Sentiment changes throughout the day, and inquiries alone can move prices in the market."

A few bonds did trade well on Wednesday, another trader said. On that list was Abu Dhabi's 2014s, Abu Dhabi Commercial Bank's 2014s and Lebanon. The sovereign's 2022s were seen trading up at 100.50.

"That's impressive. Just 10 wider on the month now. This credit is still holding very well," he said. "The 2019s are closing at 103.12 bid, 103.62 offered, also impressive."

Spreads widen

The Markit iTraxx SovX spread was trading up at 288 basis points at the open on Wednesday but settled back down at 284 bps. The JPMorgan Emerging Markets Bond Index Plus spread started the day wider by 4 bps, at Treasuries plus 358 bps.

"Initial cash bids that were hit have come back," a trader said. "You have to be impressed by the ongoing benign nature in Europe, the Middle East and Asia given that the sell-off of European bank assets over the last week has left a system basically on its knees, trading at massive discounts to book value and with sub debt trading levels that make capital raising prohibitive."

Still, Russia-based Vimpelcom's 2022s looked cheap, as did the long end of the KazMunaiGaz and Gazprom curves, he said.

Ukraine was a standout, with "amazing strength in the sovereign curve," he said. "But yes, corporate risk remains another matter."

And South Africa continued to lag.

Sukuks get support

Meanwhile, sukuk issues started the session on Wednesday with some support, especially for HSBC Middle East, Sharjah Islamic Bank and Ras al-Khaimah, a trader said.

HSBC's 2015s were trading at 99.70 bid, 100.10 offered while the lender's 2016s were seen at 102.33 bid, 102.68 offered.

"The Abu Dhabi National Energy Co. curve moved a little more balanced in the past few sessions, although it still feels like there's good local sponsorship for the credit," he said. "Dubai Water and Electricity Authority's 2016s remain squeezed. Month-on-month versus DEWA's 2020s it has outperformed by about 50 bps."

Names from Qatar were trading fairly well, with the 2040s seen about 8 bps tighter on the week with a 125 handle, and there were still a few Street shorts on Emaar Properties and Emirates airlines.

Russia paper stable

Looking to Russia, most of the quasi-sovereign names were stable on Wednesday morning.

There was a wide mix of performance among bonds from Kazakhstan, depending on the name. And Turkey's corporates and banks were quiet on Wednesday.

In trading from Africa, Morocco's 2017s and Egypt bonds were squeezed on Wednesday.

"A buyer went around the market yesterday on Gabon," a trader said. "Apart from that, this sector is not feeling much love."

Brazil could issue next

With widespread risk aversion, activity in the primary market has been severely limited, though that situation could soon change, said Enrique Alvarez, debt strategist with think tank IDEAglobal.

"On the debt side you don't have very intense activity," he said. "With U.S. Treasuries at such low yields, there's a lot of talk of perhaps some additional issuance to come."

Brazil, for example, is rumored to be considering an issue of notes.

"With 10-year bonds at about 2%, it's an extremely appetizing region in which to price," Alvarez said. "Even though the spread might not be the tightest they'd ever obtain, in absolute yield terms it's the lowest you'd see or could imagine at this time. So it's very tempting."

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