Prospect of a Greece deal boosts EM assets in surprising rally; Turkey notes in demand

By Christine Van Dusen

Atlanta, Jan. 20 - Emerging markets assets ended the week on a high note, with tightened spreads and significant demand noted for most bonds on Friday.

"What a week for credit product," a London-based trader said. "The emerging markets story is firmly back on, with huge demand. The market remains solid as a rock."

Bucking that trend were assets from Kazakhstan, which by Friday were seeing little interest, though defaulted lender BTA Bank's 2018s managed to climb as high as 18.50.

"BTA's results came out, which simply confirmed their weak state, but the bonds are still between 18 and 19."

Meanwhile, Dubai and Qatar's Qtel International saw solid week-on-week moves.

"A special mention goes to Ukraine, as the improvement in gas talks propels their curve 100 bps tighter in the five-year sector," a trader said.

The good mood stemmed from reports that Greece may have arrived at a debt-swap deal with private investors, a move that could help the troubled sovereign avoid a nasty default and allow Greece to get bailout funds from the European Union and the International Monetary Fund.

"Markets are relatively calm," according to a report from Barclays Capital Markets. "Uncertainty has declined substantially in the past few days, with various implied volatility measures across assets falling to levels last seen in early August 2011."

In response, some recent new issues got a boost, including the $1.5 billion 6¼% notes due 2022 from Turkey. The notes rallied 1½ points on Friday after pricing at 99.244 to yield 6.35%, or Treasuries plus 445.3 basis points, via Barclays Capital, Citigroup and JPMorgan in a Securities and Exchange Commission-registered deal.

"The market goes crazy for Turkey risk," a trader said on Friday. "The new Turkey 2022s are still firm despite more profit-taking today."

African spreads tighten

In other trading, African bonds had a solid week of spread tightening, helped by U.S. Treasuries moving back to 2%.

"The main interest here is focused on two way flow from GTB Finance's 2016s, ahead of their 2012s' maturity next weekend, and some African Export-Import Bank action," a trader said. "Namibia and Nigeria bonds are trading well. They're buys on any dips."

And the 2024 notes from South Africa - which recently came to the market at par - finally managed to push through their issue price after seeing a drag on their curve.

"In the face of the U.S. Treasury move, that's a solid effort," he said.

And Russia's Gazprom, which led the charge all last week, didn't move much on Friday.

"That's allowed the rest of the sector to play catch-up," a trader said.

EM rally shows strength

Some market-watchers have been surprised at the strength of the current rally.

"While we expected conditions to improve this year, we have been surprised by the speed and intensity of the rally," according to another report from Barclays Capital Markets. "Yet we do not think valuations are stretched and believe differing performance year to date suggests relative value opportunities."

Assuming risk aversion declines further next week, the bank recommends investors be overweight in EM credit, particularly in Latin American and Asian names.

"Next week we'll see the Chinese New Year, the meeting of the Federal Open Market Committee and perhaps a Greece deal," a trader said.

Sberbank plans marketing trip

In deal-related news, Russia-based lender Sberbank is planning a roadshow from Jan. 23 to Jan. 26 for a possible issue of notes, a market source said.

The marketing trip will begin on the West Coast and travel to New York and Boston before concluding in New York and London.

"Sberbank confirmed that they will likely be next up in the new issue space," a trader said. "But unlike the spanking Turkey took earlier in the week, their curve remains unchanged."

In other deal-related news, Hong Kong-based infrastructure and service conglomerate NWS Holdings Ltd. is delaying its planned issue of dollar notes due to market conditions, a market source said.

Deutsche Bank, HSBC, JPMorgan and Standard Chartered were the bookrunners for the Regulation S notes, which were talked at the Treasuries plus 550 bps area.

Market sources say the issuer will wait until after the Chinese New Year to pursue any deal.

EM bond funds see inflows

Emerging markets bond funds attracted inflows of $172 million for the week ended Jan. 18, according to data tracker EPFR Global.

"Emerging markets corporate bond funds enjoyed their best week since early August," EPFR said in its latest report. "Corporate bonds have outperformed as more high quality companies have turned to this market in lieu of scarce bank loans."

Hard currency funds took in $157 million for the week while local currency funds saw outflows of $48 million.

"Investors are starting to pencil in a lot of quantitative easing, interest rate cuts and fiscal stimulus to their assessment of the global economy's prospects, with all that means for growth, yields and inflation," noted said Cameron Brandt, EPFR's global director of research. "They remain wary of equities. But flows into higher yielding forms of debt are picking up."

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