'Uneasy calmness,' 'little activity' for EM after Fed news; bond fund outflows record high

By Christine Van Dusen

Atlanta, June 21 - Emerging markets issuers and investors were shell-shocked on Friday after a week of significant volatility, following news that the United States Federal Reserve could soon taper back its bond-buying program.

After two days of rampant selling, investors seemed exhausted and took a bit of a breather on Friday. Spreads, which had been widening all week, widened further.

"After yesterday's sharp moves, markets this morning are opening with an uneasy calmness with little activity," a London-based analyst said.

The Markit iTraxx SovX CEEME ex-EU index spread on Friday moved 4 basis points wider to 245 bps over Treasuries, while the Markit iTraxx Crossover index spread - seen Thursday at 476 bps - moved out to 482 bps over Treasuries to finish the week.

"Aftershocks from this week's FOMC meeting, at which the Fed signaled its intent to begin reducing the pace of asset purchases later this year, continue to roil financial markets," according to a report from Barclays.

The primary market was quiet on Friday, save for a few issuers that took steps toward doing new deals. Russia could issue eurobonds, Export Credit Bank of Turkey SA (Turk Eximbank) is looking to do a euro deal, and Turkey could print dollar-denominated Islamic bonds this year.

Meanwhile, money fled emerging markets bond funds during the week. The funds saw outflows of $2.64 billion for the week ended June 19, according to data tracker EPFR Global.

"Investors continued their recent exodus from emerging markets fund groups, with redemptions from emerging markets bond funds hitting a 90-week high," according to a news release from EPFR.

Outflows the previous week totaled $2.52 billion.

Hard currency hit hard

This week, most of the outflows focused on funds with hard-currency mandates, with $1.3 billion flowing out of the funds. About $951 flowed out of local-currency funds and the rest from blended funds.

"The outflows from emerging market bond funds were the highest since late third-quarter 2011," EPFR said.

Funds with local-currency mandates had their worst week in more than 20 months, EPFR said.

Two-way for MAF, Batelco

In trading on Friday, some two-way activity was noted for Majid al-Futtaim Holdings' 2019s, as well as for Bahrain Telecommunications Co.'s 2020s.

"The range yesterday was 90 to 93," a trader said.

Investors showed some interest in Emirates NBD's recent perpetual notes while sellers were spotted for Kuwait-based Kipco's 2016 notes.

DEWA notes suffer

Front-dated bonds from Dubai Electricity and Water Authority were about 30 bps wider on the week, the London-based trader said.

"One of the best-regarded credits in the region, and after the successful payment of their 2013 bond recently I always thought DEWA's 2015 and 2016 would be a good defensive places to be involved," he said. "The 2016s on the bid side are yield 3¼% and the 2015s 2¾%."

Ukraine buyers emerge

Some cautious buying has emerged this week for bonds from Ukraine, said Svitlana Rusakova of Dragon Capital.

That pushed the notes off lows.

"The same pattern was observed in the corporates as sellers refrained from hitting the adjusted bids," she said. "As usual, we continued to see interest in short-dated names."

Outperformers included The State Export-Import Bank of Ukraine's (Ukreximbank) 2015s and JSC Naftogaz of Ukraine's 2014s.

Turkey in focus

Turk Eximbank is looking to issue €200 million of notes to refinance debt.

And Turkey could issue dollar-denominated Islamic bonds this year, a market source said.

The sovereign is particularly vulnerable in this volatile market, according to a report from Barclays.

"There is considerable focus on large foreign investor positions in EM local bond markets at risk of exiting or buying FX to hedge their positions," the report said. "Of the major EM markets, Turkey is probably the most vulnerable in terms of FX hedging flows."

Russia could issue notes

In other news on Friday, Russia announced plans for a possible issue of eurobonds with a tenor of between five years and 10 years, as well as a tranche of 30-year notes, a market source said.

No other details were immediately available on Friday.

"Given current conditions, a 30-year would be difficult to issue," the London-based analyst said.

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