EM closes week with firm tone; Argentina, Ecuador, Venezuela rally; funds see 8th straight inflow

By Paul Deckelman and Aaron Hochman-Zimmerman

New York, June 15 - Emerging markets debt closed the week on a firmer tone, according to market sources.

Some of the existing paper of Ecuador and Venezuela, where local politicians seemed bent upon doing what they could to amplify recent market volatility, generating headlines that appeared tailored to stymie investors, was seen to have some much needed traction toward the end of the week.

Meanwhile Indonesian and Philippine credit default swaps resumed the flight pattern they were tracking before the mid-June volatility took hold - hovering near their all-time tights.

And volatility in stocks and U.S. Treasuries appears not to have eroded investors' appetites for EM debt, as the dedicated emerging markets bond funds took in $272 million during the most recent week, chalking up their eighth consecutive inflow, according to EmergingPortfolio.com Fund Research.

Comfort zone

Existing emerging markets debt was seen better on the day, closing out the week with a boost from benign U.S. consumer price data which indicated that inflation is not out of control, lessening the likelihood of a Federal Reserve rate hike in the near-term.

That, in turn, was seen as a positive for emerging market investments whose attractiveness would be lessened by higher U.S. interest rates.

After Washington reported that annual core inflation came in at a lower-than-expected 2.2% in May - not too far off the Fed's comfort zone of 1% to 2% - and when another report showed softer-than-expected U.S. industrial output, U.S. Treasuries shot upward and their yields came in, with the benchmark 10-year issue's yield tightening to 5.15% from Thursday's close at 5.22%.

That in turn acted as a catalyst for the emerging names, which had been hard hit around the beginning and middle of the week, in line with the sell off that took Treasury yields to their highest point in five years.

The widely followed EMBI + index of junk bond performance compiled by JP Morgan & Co. ended the week with emerging debt trading at an average spread against comparable U.S. Treasuries of 156 bps - down solidly from the 162 bps that the index had hit earlier in the week, after emerging debt had followed Treasuries way down.

But in Friday's market, a source observed, things were going in quite the opposite direction. "There's an offer-lifting frenzy now in EM - all cash offers are getting lifted.

"In similar fashion to how we sold off, we are now gapping higher."

A wild and crazy week

Looking back at the wild week, which saw emerging names, whipsawed around, Enrique Alvarez, the head of Latin American debt strategy at IDEA, said that it was "a down-and-up week, to describe it correctly," adding, with no small amount of understatement, "it has been crazy."

The odd thing, he said, was that "the week is going out on the same footing it came in."

"The market - which is linked in to the U.S. Treasury market and the U.S. equity market - started out looking at U.S. Treasury rates, and inflation. That was the primary focus, and what caused the selling we saw in the high-beta side of the market. The market is ending the week on exactly the same note - looking at yields on the U.S. Treasury side, and inflation, but [looking at them] through a different prism.

"What was very negative sentiment seems to have come full circle, and now seems to be at least neutral to positive sentiment."

Alvarez said the market "leaves the week on a firm tone, I think in a recovery mode."

Limited upside for stronger names

He said that the stronger junk-rated credits such as Brazil and Colombia, as well as investment-grade names - Mexico is in that category - "have been somewhat sidetracked here. They didn't do a lot of widening during the week, and I don't see a lot of uptick - I don't see them as compressing credits going forward."

Colombia, he noted, is in a unique situation of having its bonds just having been upped to investment grade by Standard & Poor's, while its overall country rating remains below-investment grade, "so it's a very curious situation - the first time in Latin America that we've had a bifurcated credit like that," leaving investors to try to puzzle it out.

He thought it "odd" that the ratings agency would change its methodology, producing the unusual split rating "in the middle of a severe market descent."

Argentina, Venezuela, Ecuador lead rally

On the other hand, the riskier names, like Argentina, Venezuela and Ecuador "led on the way down," being more severely beaten down than most other names, "and they're leading on the way back up."

Some investors, he said, were "excessively long Argentina," while Venezuela and Ecuador have "inherent political risk, and that's why there was some liquidation in there."

He allowed that in Venezuela's case, the selling likely was "excessive," given the country's underlying fundamentals - it's awash in oil money, with crude prices now hovering just under the $70 per barrel marker.

As the market was recovering towards the end of the week, "it was reasonable that over-300 bps spreads in Venezuela would attract investors, and so would 320-plus spreads in Argentina."

Alvarez noted that the EMBI+ showed a composite gain on the day of 0.31% - but Argentina soared 1.82%, Venezuela jumped 1.33%, and Ecuador sizzled with a 1.46% gain, "so that was clear outperformance" versus the overall market.

Among the dollar-denominated benchmark issues of the riskier credits, he saw Venezuela's 9¼% bonds due 2027 a point better at 111.35 bid, 112 offered - well above its lows around 108.6 that the bonds had hit in the throes of their downturn around mid-week.

Ecuador's 10% notes due 2030 were up 1½ points on the day at 88.25 bid, 90.25 offered.

A source quoted Argentina's 8.28% bonds due 2033 up more than 1½ points, ending at 100.80, while its yield tightened by 15 bps to 8.20%.

At another desk, Argentina's dollar-denominated Par bond was seen up a hefty 3.5% in over-the-counter trade, while the dollar-denominated discount bonds, which trade on the Buenos Aires Securities Exchange, rose 1.8%.

Even with U.S. Treasury yields falling on the day, Alvarez saw Argentina's average spread over Treasuries about 8 bps tighter, Venezuela's spread 3 bps narrower - and Ecuador's an eye-popping 15 bps tighter.

Back among the stronger credits, the most widely traded EM bond, Brazil's 11% benchmark paper due 2040, was up 0.70 on the day, at 131.45 bid, 131.65 offered.

In local-currency denominated bonds, Mexico's benchmark government 10-year peso bond rose about 0.40, to 97.125, pushing its yield down 6 bps to 7.68%, as the peso strengthened sharply and stocks rallied on the tame U.S. inflation data.

Asian issues held firm

Earlier in Asia, the market was generally firm, as participants awaited the May U.S. consumer price index number. Indian issues were seen leading the way, particularly banking names.

The widely followed five-year CDS contracts on Philippine and Indonesian sovereign debt, which on Thursday had hung in around a 101-102 bps bid level and 104-106 bps on the offered side, were seen having tightened markedly to around 96-101 for each - just a basis point or two above their recent all-time tight levels in the low 90s.

Not out of the woods yet

Looking ahead to the coming week, IDEA's Alvarez said emerging-debt investors will have "much less to chew on" from a U.S. economic data standpoint, although he cautioned that rising oil prices could play havoc with Treasuries from an inflationary standpoint, while there would also be continued speculation about the Chinese economy - given the role that Chinese stock market downturns have played both recently and earlier in the year in unsettling financial markets worldwide. So "there's plenty of risks - geopolitical, and economic, in the sense of China, for there to be additional upsets in the Treasury market. So that inflation-soothing effect that we saw today could be linked to just one data point in the U.S. and looking forward there could be more turbulence to come about."

Return to order

In the new issue market China's Bank of East Asia and Russia's Severstaltrans Group priced corporate deals, while updated price talk surfaced from Renaissance Bank.

Primary market sources said Friday that emerging markets looked stronger relative to the volatility that was seen earlier in the week.

"After a few whip-saw days things were rather orderly, with an over all better tone," a market source told Prospect News.

Another said: "It feels as if this period of turbulence is over."

Chinese, Russian corporates price

Bank of East Asia priced its $600 million 10-year step-up tier II subordinated notes (A3/BBB+).

The fixed rate bonds were priced at Libor plus 52 basis points, three basis points lower than initial guidance.

JP Morgan had the books for the Hong Kong-based commercial and investment bank.

The total book for the deal was $900 million. Forty accounts were involved, with 87% from Asia and 13% from Europe. By sector, 86% were banks, 8% were asset managers, 3% were funds, 2% were insurance or pensions and 1% was retail and private banks.

Meanwhile Russian port services and transportation company Severstaltrans Group priced a $175 million issue of three-year notes at par to yield 8½%, on top of price talk.

Renaissance lowers price talk

Renaissance Capital Bank lowered price talk on its upcoming dollar-denominated offering of three-year eurobonds to 9½% to 9 5/8%, from 9 3/8% to 9¾% talk that had circulated earlier Friday.

The Moscow-based commercial and investment bank is expected to price the Credit Suisse-led deal after Monday.

CIS, Argentina offer new deals

Argentine food producer Arcor SAIC is in the market with a $100 million offering of 10-year senior unsecured amortizing notes (B+/BB-), a deal being quarterbacked by Citigroup.

A roadshow is scheduled on June 20 in London, June 22 in Los Angeles, June 25-26 on the US east coast. Pricing is expected on June 27.

Meanwhile Credit Bank of Moscow plans a 2 billion ruble senior unsecured local-currency issue (A1).

And Belarus-based Priorbank announced plans to place two-year fixed-rate notes.

Raiffeisenzentralbank, and VTB Group will lead the deal.

A roadshow is expected the week of June 18.

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