Emerging market grinds tighter; Indonesia expected to issue new bonds Thursday

By Reshmi Basu and Paul A. Harris

New York, March 1 - Emerging market debt inched tighter once more Wednesday, fueled by positive technicals and stronger equities as the asset class shrugged off weaker U.S. Treasuries. Nonetheless, the market traded in tight ranges a day after a short-lived bout of profit taking.

In the primary market, Indonesia's dollar-denominated benchmark sovereign bond offering (B2/B+) will include a tap of its 8½% bonds due October 2035 in addition to a previously announced new 2017 tranche.

Tranche sizes remain to be determined.

Barclays Capital, JP Morgan and UBS Investment Bank are leading the Rule 144A/Regulation S offering. Pricing is expected on Thursday.

The 2017 tranche is talked at 7% to 7 1/8%.

Meanwhile the tap of the October 2035 notes is talked at 7 3/8% to 7½%. In early October 2005, Indonesia priced a $600 million issue of its 8½% bonds maturing in October 12, 2035 at 98.666 to yield 8 5/8%.

Meanwhile Mexico's benchmark-sized offering of dollar-denominated global notes due 2017 (Baa1/BBB/BBB) is expected to price on Friday.

Marketing of the offering is underway in Asia, Europe and the United States.

Goldman Sachs & Co. and Morgan Stanley are leading the offering of notes, which have been registered with the U.S. Securities and Exchange Commission.

Proceeds will be used to help fund a $5 billion tender for outstanding debt.

Mexico last tapped the dollar-denominated sovereign bond market in January 2005 pricing a $1 billion add-on to its 6 5/8% bonds due March 3, 2015 at 107.10 to yield 5.694%, increasing the size of that issue to $2 billion.

EM tighter

Emerging market debt was again moving tighter Wednesday, choosing to ignore a U.S. Treasuries pullback. Instead the market was pushed higher by stronger performances by global equities.

The day before, the market sold off on the back of a disappointing upgrade of just one notch for Brazil by Standard & Poor's. Investors had anticipated two notches.

But Tuesday's sell-off ushered back buyers for Brazilian securities, according to market sources. Brazil saw a better mix of local buyers and real money, according to one market source.

Overall the market traded in tight ranges with a few standouts. Sources noted that Brazil's curve continues to flatten as more buyers tapped the long end. Additionally, the long end is trading like investment-grade, they observed.

On the short end of the curve, bonds are softer on the slackening of the repo market, according to an analyst note.

During the session, the Brazilian bond due 2040 gained 0.20 to 133.10 bid, 133.20 offered.

Furthermore, Argentina had a stellar performance as locals continued to buy. Its discount bond due 2033 added 0.55 to 100.85 bid, 101.25 offered.

And Turkish bonds saw a volatile session, but managed to close out the session at record-low spreads, according to a source. At late afternoon, the Turkish bond due 2030 was spotted at 159.375 bid, 159.625 offered, up 0.63.

Strong technicals

Nonetheless, everything is looking good for the asset class. Sentiment is strong, inflows are robust, fundamentals are positive. And Latin America is on buyback bender. In total, Latin American countries are expected to soak up nearly $20 billion of external debt through repurchases and redemptions.

Last week Brazil said it would redeem $6.64 billion of Brady bonds while Mexico launched a tender offer for $5 billion in foreign currency bonds.

This week Colombia said it would buy back up to $4.2 billion of bonds. And Venezuela said it would retire $3.9 billion of outstanding par and discount Brady bonds as well as repay $813 million of multilateral and bilateral loans.

"We think it's a very positive trend and we expect it to continue," noted a buyside source, adding that the buyback themselves were not surprising but what was astonishing was that all of the announcements came on top of one another.

"It's positive that some of the countries are actually issuing local currency market bonds in exchange for the dollar-denominated bonds that they own," remarked the source.

"Again I think this just comes to support the very strong technical outlook that we have," backed by less dollar-denominated issuance this year, strong flows into the market and good demand for local currency issues, noted the buyside source.

"We've booked a very good return in the first two months this year."

However, at the beginning of the year, with spreads so tight, many had wished for some sort of market correction to cheapen the market. But the buybacks have become tantamount to that since so much external debt has been taken out.

"So far the argument that everyone was making was that fundamentals are positive. Spreads are probably fairly valued here," remarked the buyside source.

"But this is a new development, all these buybacks. Where before it was fairly valued to maybe a little expensive, I think sort of we went into fairly valued to slightly cheap territory."

Moreover, the buyside source's strategy remains the same in the context of a changing emerging market environment.

"We've been fairly positive on the asset class. We're comfortable being overweight.

"If anything we're in a position to add if there are sell-offs. I think so is everyone else," the source told Prospect News.

Elsewhere, one source said that at a recent investor forum at London, a person from the sellside noted that the drivers behind flows into the asset class were changing. Traditionally, pull factors were behind flows into the market. But those factors, such as attractive spreads and improving fundamentals, are becoming meaningless in this current environment.

Instead push factors, such at the search for yield by pension funds, are driving higher flows. Additionally, new investors are coming from developed markets.

© 2015 Prospect News.
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