Dominican Republic’s new tap gains; Turkey’s Yapi Kredi bonds look ‘somewhat attractive’

By Rebecca Melvin

New York, June 14 – Emerging markets ended little changed on Wednesday after a U.S. Federal Reserve rate hike that was widely expected. There were some newer bonds in focus and getting a lift, however, including the Dominican Republic’s new $500 million tap of its 5.95% bonds due 2027.

The Dominican Republic bonds were better by about a point after pricing at a reoffered 106.38 on Tuesday.

“There was initial disappointment with the pricing at the tight end of the range and there was some late selling from flippers late in the day yesterday. However, like everything else today they are ripping, at 107.1 to 107.6, with little volume trading in the street,” a trader said about the Dominican Republic tap.

Earlier, Turkey’s Yapi ve Kredi Bankasi AS (Yapi Kredi) said it was offering a benchmark $500 million of seven-year bonds at 5.85%, which was getting a look from investors.

The bond was considered somewhat attractive at implied spread levels of mid-swaps plus 398 basis points to mid-swaps plus 411 bps, MUFG Securities analyst Trieu Pham said in a note. The spread levels implied a higher 6% to 6 1/8% coupon.

The general tone of emerging markets remained one of caution, given currently robust pricing, an emerging markets strategist said.

“It was pretty certain with the Fed, and doesn’t really change anything,” the strategist said. Instead every country has its own set of sovereign risks, and emerging market credit “has had a rally in the last six to 12 months, leaving investors focused on what is going to drive it higher at this point.”

There is noy too much on the horizon that would pull it higher, the strategist said. The economic picture for the United States “isn’t that great. Europe is okay and China is still a question.”

In addition, energy prices have been weighing on many countries in the emerging markets. Crude oil prices dropped 4% on Wednesday to their lowest levels this year after new data pointed to an ongoing supply glut.

The Federal Reserve lifted its benchmark rate for the second time this year pulling the federal-funds target rate up to 1% to 1¼%. The Fed also reduced its expectations for economic growth and inflation and said that it was going to be reducing its portfolio of bonds and other assets that currently stands at about $46 trillion.

The Fed will allow an initial reduction of about $6 billion of government bonds.

In its statement following its two-day policy meeting, the Federal Open Market Committee said that inflation on a 12-month basis had declined recently and is running below 2%. But the FOMC expects it to stabilize around the 2% objective over the medium term.

“Near term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely,” according to the statement.

Meanwhile the latest supply data in energy markets tanked those markets with the price for front-month West Texas intermediate crude oil falling 3.7% to $4.73 per barrel, its lowest close since Nov. 14.

The Energy Information Administration said that crude stockpiles fell last week by 1.7 million barrels, less than the 2.6 million drop that was expected; and gasoline inventories rose by 2.1 million barrels, compared to an expected 700,000-barrel decline.

In other data, the Paris-based International Energy Agency said that the oil stockpiles in the Organization for Economic Cooperation and Development rose 18.6 million barrels in April and were higher than they were when OPEC agreed to cut production last year.

“Markets are not in the middle of a big rally. Prices have rallied a lot this year already and investors are trying to figure out what next to trade,” a strategist said about Latin America.

A lot depends on the political situation of each country, the strategist said. “A week or two ago, many thought Brazil might be a transition, which the old president leaving and a new caretaker president stepping in. The markets were responding favorably to that, but now it looks more likely that the existing president could stay on, so people are a little more cautious,” the strategist aid.

In Mexico, the currency has been on a decent rally recently and that seems like it is continuing. But oil prices remain on the low end of the range and that it going to weigh on Mexico and others.

If global markets really start to move up sharply, then emerging markets will follow suit. But without that, emerging markets in general look expensive and investors are cautious.

Investors are saying, “Wow, things have tightened up a lot in the last six to 12 months, but the political risks look like they are greater than they were before,” the strategist said.

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