Morning Commentary: EM debt sees decent bid amid summer volume; MENA mostly tighter

By Rebecca Melvin

New York, July 6 – Investors were snapping up emerging markets debt for a third straight day – albeit on slim summer volume – as markets quieted into the weekend on Friday with distractions like the soccer World Cup and holiday plans vying for investors’ attention, a London-based trader said.

“There’s decent buying,” the trader said, noting South Africa and other Africa sovereigns were doing well, as were Egypt and other high-beta Middle East names. But Bahrain was a laggard.

African spreads were tighter by 15 basis points to 25 bps, but Bahrain was wider by 5 bps to 10 bps, the trader said.

The buoyancy was attributed to investors wanting to put money back to work in the face of a lack of new supply and amid some short covering, and despite news that the first set of trade tariffs imposed by the United States and China on the other’s imported goods was put in place and despite a strong U.S. June employment report that was deemed supportive of the U.S. central bank’s more assertive pace of tightening rates.

Bahrain’s sovereign credit curve, which saw a weaker short end compared to the long end on Friday, has been volatile this past week as investors weighed headlines regarding the Kingdom’s constrained finances.

Since Saudi Arabia, the United Arab Emirates and Kuwait pledged to provide a backstop for the sovereign two weeks ago there has been trending recovery, but there were blips when fears regarding debt restructuring torpedoed the credit. Bahrain has a $750 million Islamic bond that matures in November and is unlikely going to be able to gain access to the credit markets to refinance the paper.

But its allies are discussing all options regarding aid for Bahrain as part of an integrated program put in place to support economic reforms and fiscal stability.

“The general consensus is that the Saudis, UAE and Kuwait will come through with some sort of support package and that is in the background,” a market source said.

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