Emerging market debt softer on low volumes; Korea's GS Caltex sells $200 million in bonds

By Reshmi Basu and Paul A. Harris

New York, Aug. 1 - Emerging market debt was softer Tuesday in thin trading, as investors awaited Friday's pivotal release of non-farm payroll numbers in the United States.

At the end of the session, the JP Morgan EMBI Global Diversified index was wider by two basis points. Spreads for major credits were mostly unchanged during a calm trading session.

On the primary front, South Korean oil refinery company GS Caltex Corp. sold $200 million of 10-year bonds (Baa1/BBB+) at 98.98 to yield a spread of Treasuries plus 114 basis points or 6.138%.

The deal came just below price guidance, which was set at Treasuries plus 115 to 117 basis points or in the area of 6.15%.

Deutsche Bank and Goldman Sachs were the bookrunners for the Regulation S transaction.

Investors sidelined ahead of jobs data

Emerging market debt saw lower prices Tuesday as investors sat out the session in anticipation of Friday's employment numbers.

The market is hoping that those statistics will shed light as to how the Federal Reserve will act at its next meeting on Aug. 8. Many market participants are hedging their bets to allow for a pause by the Fed, which one investor finds peculiar.

He expressed surprise that the bond market is not pricing in a higher probability that the Federal Open Market Committee will raise fund rates for the 18th straight time to 5½% at its next meeting.

Fed Funds futures have been pricing in a 30% chance of a rate hike. The buyside source considered those odds much too low.

Besides the lack of clarity on the Fed picture, the investor is also concerned about the stretched valuations across the emerging market asset class. Bargains are still hard to come by, even after the market's recent sell-off in May and June, which was triggered by lower U.S. stocks and higher oil prices.

Currently, spreads on the JP Morgan EMBI index are back under 200 basis points versus U.S. Treasuries.

'Too tight' valuations

Prior to May, investors complained that the asset was still too expensive. And even after the sell-off, "nothing has changed," noted the buyside source.

"Valuations are still too tight and I think too many people are still long," he added.

Meanwhile the source said that he said he does not believe there is a lot of cash on the sidelines.

"You had a couple of new deals in the last couple of weeks. And I think that has sopped up some of the cash. You've had redemptions," he said.

The investor said he has not seen the type of frenzy that was seen at the start of 2006 when "money was being thrown into the market."

"I don't think you have the huge amount of imbalances necessarily like you had at the beginning of the year when you had bonds being bought back by the countries, but there was a lot of cash and so that was a great dynamic," he observed.

Instead, even though the magnitude of the outflows has died down since May, the market is still posting negative flows. That coupled with a little supply has created a more balanced technical picture, he said.

Nonetheless, finding value in the market is an arduous task. To do that, investors must locate credits that give yield.

"You aren't going to make that much money buying Mexico at 6% and selling it at 5.80%," he added.

Furthermore, the investor has been underweight in emerging markets. He described that strategy as being a "tough trade" in the past year or so.

"In the second quarter, it was a great trade. July, it definitely did cost us some. You did have quite a strong bounce back in July.

"I think values went from slightly rich to very rich - not cheap - to rich," he told Prospect News.

© 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.