Emerging market funds see record inflow; market widens with equities; primary stays quiet

By Paul A. Harris

Portland, Ore., Feb. 10 - Cash bonds in the emerging markets space were weaker with equities on Friday, a trader said late in the New York session, noting that the major American stock indexes were heading out in the red.

The JPMorgan Emerging Markets Bond Index, EMBI Global Diversified, ended the day 7 basis points wider at a spread of 386 bps bid.

Negative sentiment spread throughout the capital markets when news circulated that Standard & Poor's lowered the credit ratings on 34 Italian banks, according to an investor.

Earlier a London banker noted that the Markit iTraxx SovX Western Europe Index was finishing the European session 29 bps wider on the day.

News of the market's weakness stood in stark contrast to the most recent information on the asset class's technical vitality: emerging markets bond funds pulled in a record-setting $2.14 billion during the week to Wednesday, according to EPFR Global.

First flow to top $2 billion

The most recent weekly inflow to emerging markets bonds is the first ever to top the $2 billion mark, according to EPFR's director of research Cameron Brandt.

It follows the previous week's $1.15 billion inflow and it extends year-to-date inflows to $3.79 billion.

"Yield hunger is becoming yield famine," Brandt commented on Friday, adding that with accommodative postures being adopted by central banks in Europe and the United States, the customary driver of emerging markets rallies - easy credit in the developed world - is back in place.

"All of the flows are being inflated by the sheer amount of liquidity, a lot of which has piled up in money market funds," Brandt added.

To find a larger inflow than the one for the week to Feb. 8 it is necessary to dial back the calendar all the way to the week ending April 14, 2010, when the emerging markets bond funds took in $1.79 billion, Brandt said.

Poland prices €527 million

Activity in Friday's primary market was muted.

Poland's Ministry of Finance announced the pricing of a €527 million issue of 4.814% 10-year bonds at a 242 bps spread to mid-swaps. The bonds were priced at par.

HSBC ran the books for the registered deal.

Long-term investors in Germany and Austria took down the deal, with insurance companies taking 80% and pension funds taking the remaining 20%, according to a press release.

Look for a busy week ahead

Negative sentiments at week's end notwithstanding, look for activity in the new issue market to remain active during the week ahead, sources said on Friday.

In the high-yield corporate space, Indonesia's PT Berau Coal Energy plans to hold a roadshow for $500 million of notes (expected ratings B2/B) in the United States on Monday and Tuesday.

Initial guidance is in the 9% area.

Credit Suisse and Deutsche Bank are the bookrunners.

The Jakarta-based energy company plans to use the proceeds to repay debt and help fund the acquisition of Maple Holdings Ltd. from Regulus International Pte. Ltd.

In the sovereign space the Republic of Latvia is expected to wrap up a roadshow on Monday, ahead of a possible issue of notes.

Deutsche Bank, HSBC and JPMorgan are the bookrunners for the possible Regulation S transaction.

Meanwhile recently priced issues were hanging in on Friday, a buyside source said.

The Braskem SA add-on notes to the 7 3/8% perpetual senior notes were straddling issue price at par bid, par ½ offered.

The $250 million deal priced Thursday at 100.375.

It played to a $600 million order book, according to sources.

"There were European banks and some real money in there," a European sellside source said.

Also there was color on the Reliance Industries Ltd. $1 billion issue of 5.4% 10-year notes (Baa2/BBB) at a 345 bps spread to Treasuries on Thursday.

In a Friday press release the Mumbai, India-based petrochemical company stated that its deal was the first corporate bond from India in 2012, and the largest high-grade private corporate issuance in the oil and gas sector from Asia in the past 12 months.

The deal saw play from nearly 400 accounts in Asia, Europe and the United States, the company added.

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