Emerging market debt inches higher; fund outflows hit new high

By Reshmi Basu and Paul A. Harris

New York, May 18 - Emerging market debt rose in calm trading Tuesday as a limited amount of buying from bargain hunters contended with continued unwinding of carry trade positions.

The quest for the bottom of the current range has forced investors to remain on the sidelines as very few are prepared to be the first ones to enter the technically weak market, even if fundamentals are strong.

"At this point, it's all very psychological," said a trader. "There are so many uncertainties out there. The one thing we know is that the Fed is tightening but until we see whether the increases are 'measured,' the uneasiness will stay."

"Whether the worst is behind us, I can't say. But we seem to be seeing some a little more positive yet extremely cautious attitudes."

The JP Morgan EMBI Index rose 0.25% Tuesday while its spread widened by seven basis points to 503 basis points.

"Brazil was better this morning. It sold off a little bit after that," said a buy-side source.

By afternoon, the day was a mixed bag for Brazilian sovereigns.

The Brazil benchmark 8% C bond due 2014 was down 1/8 of a point at 88.75 bid, 89.375 offered while the 11% bond due 2040 was up half a point at 88.25 bid, 88.875 offered. The Brazilian bond 12¼% due 2030 was up a point at 2030 97.5 bid, 98.25 offered in late afternoon trading.

More Turkey concerns

Meanwhile, investors voiced concern over Turkey's domestic politics as an education reform bill has generated secular division.

"The story before was Cyprus," said the trader. "Now we have a feud between the government and religious groups."

Turkey's 9½% bond due 2014 was at 96.50 bid, 97.1875 and the 8% bond due 2034 was at 85.875 bid, 86.50 offered.

Russia jumps higher

And a market source told Prospect News that Russian sovereigns were "bouncing all over the place".

The 5% bonds due 2030 went to 90¼ from 87 5/8 and the 12¾% bonds due 2028 went to 142½ from 1371/2.

Russia has been performing well given high oil prices. But those bidding days may come to an end as investors reduce their exposure.

"People made their money and it might be time to move on before the rate hikes kick is," said the trader.

Year's worst week for fund outflows

Emerging market bond funds had outflows of $228.2 million during the week ending May 12, the most outflows in a single week this year and the biggest exodus from these funds since EmergingPortfolio.com Fund Research began tracking them on a weekly basis in 2001.

Carry trade sell-offs and reduced exposure were a few of the drivers behind last week's frenzied sell-off.

"Carry trades are getting unwound and crossover investors are crossing back to the comfort of more conservative exposure," said Brad Durham, managing director of EmergingPortfolio.com.

"And a lot of it is entirely divorced from fundamentals. But in the near term, the level of risk aversion has risen." Other factors include geopolitical events, interest rate worries, concerns about China's economy cooling off and a whole host of various factors.

Durham told Prospect News that the sell off will continue in the near term.

"Given the speed at which emerging market bond yields have widened and the spreads widened, I think at some point it will begin looking attractive again - probably sooner rather than later.

"But certainly the speed at which these factors have priced in, especially bond market prices the way they have performed vis-à-vis high yield, has stunned a lot of strategists who would have expected that the performance would have been a little more correlated," said Durham.

"I think bonds, perhaps even sometime this year, may start looking attractive again to some of these investors who have been responsible for infusing so much liquidity into this asset class."

The buy-side source quoted earlier agreed that investors will return when the Fed takes action, providing clarity for a murky market.

"By the time that interest rate hikes happen I think people will feel better about this because most of the carry will be gone, and people will feel more comfortable about buying."

By comparison, AMG Data Services reported an outflow of $2.15 billion from high yield mutual funds for the week ending May 12.

Ukreximbank, Korea Land to roadshow

In primary news, Ukraine's Ukreximbank will roadshow its $100 million-plus offering of three- to five-year bonds starting this month. The issue is expected to price in June.

And Korea Land Corp will start a roadshow for its $500 million 10-year bonds this week.

The roadshow is expected to make stops in Singapore on Thursday, Hong Kong on Friday and finish off in New York next Monday.

Citigroup and Deutsche Bank Securities are joint bookrunners

© 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.