Risk appetite wanes on U.S. payrolls data to end 'roller coaster' week; fund outflows eyed

By Christine Van Dusen

Atlanta, Dec. 3 - A weaker-than-expected report on U.S. employment kept the primary market silent and volumes thin on Friday, capping off a whiplash-inducing week of ups and downs for emerging market debt.

In response to the news that non-farm payrolls climbed just 39,000 in November and the unemployment rate rose to 9.8%, risk aversion returned and some spreads widened.

"Non-farm payrolls were far from exciting, so U.S. Treasuries are very well bid now," a London-based trader said.

But overall, the JPMorgan Emerging Markets Bond Index Plus - which tightened by 4 basis points before the payrolls announcement - finished the day at 240 bps, down from 250 bps on Thursday.

This comes at the end of a dizzying week of undulations for the market, first weakening on news of Ireland's bailout and Korea's tensions, then strengthening on better U.S. economic data and the European Central Bank's comments about bond-buying, then weakening again on the employment news.

"It's been a roller coaster week," a London-based trader said.

Still, the market "seems to have shrugged off the Ireland worries and feels a lot cleaner going into year-end," he said. "Otherwise it's all a bit dull as traders are tired and looking forward to the weekend."

Primary quiet

The primary market was once again quiet. "New issues remain on the back burner," the London trader said.

He was still keeping an eye out for the planned issue of $2 billion in global bonds in a Rule 144A and Regulation S transaction from Development Bank of Kazakhstan.

The deal is being marketed on a roadshow with Deutsche Bank, Citigroup, JPMorgan and Halyk Finance.

Other deals on the radar screen include the planned issue of euro-denominated notes from Poland's Koleje Mazowieckie (Mazovian Railways) via Standard Bank and a possible deal from Brazil-based telecommunications company Telemar Norte Leste SA.

Brazil in focus

The latter deal - with bookrunners HSBC, Santander, BB Securities and Espirito Santo Investment Bank - already is getting a lukewarm reception.

"We see more downside than upside potential in the medium term," according to a Barclays Capital research report.

Also from Brazil, the $300 million perpetual notes issued in November by sugar producer Cosan Overseas Ltd. - which came to market at par to yield 8¼% with bookrunners Credit Suisse, Morgan Stanley and JPMorgan - appear cheap, Barclays said.

"We recommend swapping from the 2017s," the report said.

This comes as the Brazil sovereign attempts to slow credit growth with new hikes in reserve, capital and deposit requirements.

"In our view, they essentially represent the start of the second leg of the tightening cycle in Brazil," RBC Capital Markets said in a report.

These moves were already priced into the markets, RBC said.

The hikes are now expected to "drive a strong repricing of the very short end of the curve, with markets phasing off from a possible first rate hike in December to one in January, forcing the steepening of the yield curve," the report said.

Outflows again

Emerging markets bond funds again saw outflows, this time totaling $212 million for the week ended Dec. 1 - part of the first two-week outflow streak seen since April 2009, according to data tracker EPFR Global.

That's a slight improvement from the previous week's outflows of $485 million, which broke a 25-week streak of inflows.

To blame, EPFR said in its report, is risk aversion inspired by the eurozone debt crisis, China's efforts to keep property prices in check, uncertainty about U.S. fiscal policy and tensions in Korea.

As these concerns eventually decrease, "the flows will come back pretty quickly," said Cameron Brandt, senior analyst with EPFR.

"There hasn't really been any real change in the relative investment case," he said. "If anything, it's gotten slightly stronger relative to European debt. But it's an asset class that's not without risk, and that's something people have cheerfully put in the back of their minds at some points this year."

Given the current level of anxiety, the level of outflows is actually pretty moderate, Brandt said.

"My sense is that there will probably be modest inflows for the coming week," he said. "Around Christmas they tend to go a bit flat anyhow. Though in some years people decide to shore up positions so sometimes the flows toward the end of the year tend to be much more short-term and tactical, rather than driven by any long-term vision of where the asset class is going."

There's still a great deal of liquidity out there, looking for a home, he said.

"The odds certainly favor flows picking up again," he said.

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