EM bond inflows continue to grow; Bank of Moscow sets talk; Alliance Global plans notes

By Christine Van Dusen

Atlanta, Aug. 12 - Say what you will about the summertime doldrums - they may slow new issuance to a near-crawl and lead to thinner trading volumes, as was the case on Thursday - but money continues pouring into emerging market bond funds.

Inflows into the funds were $811 million for the week ended Aug. 4, a slight decrease from the previous week's $866 million but still "exceptionally high," said Cameron Brandt, global senior analyst for data tracker EPFR Global.

Of the $811 million, about $542 million was absorbed by funds with a local currency mandate.

"Investors of all stripes are desperate for yield, and it's pretty clear they're not going to get it off U.S. instruments for the foreseeable future," Brandt said. "When it comes down to the simple question of returns, U.S. debt has not been able to pull too much attention away from EM issues."

There seems to be a marked shift in thinking about emerging market debt, he said.

"The best we can tell, more long-term money is coming into the arena," he said. "And the willingness to take on exposure to local currency debt has grown by considerable orders of magnitude over the last 18 months."

Inflows year to date "are already 200% over the previous year," Brandt said, with the current year-to-date number at $22.4 billion.

Primary market quiet again

The supply of new deals, though, stayed stagnant on Thursday.

"New issues look to be on hold until the first week of September," a trader said.

The strategist agreed, saying he believes the primary is "pretty much dead," he said. "We could see one or two here or there, but it's highly unlikely there will be more than that. We're within historic norms. In August of last year there wasn't more than $5 billion worth of issuance. So far this monthly it's only $4.6 billion."

That's due in part, of course, to the typical summer slowdown. It's also related to "the volatility we're seeing," he said. "But investors remain pretty positive."

Trading day ends stronger

Emerging markets started the day with a "weak tone" but showed "decent afternoon strength" mostly due to solid performance from high-beta credits, a trader said.

Venezuela had been down anywhere from 1½ to 4 points since Monday but was able to recover on Thursday "and went out with offers lifted," he said.

Argentina was "tighter by 1 basis point," an emerging markets strategist said. "We're seeing tightening, if anything, even though Treasuries are off a bit today."

The sovereign's benchmark Boden 2015 bond opened down at 87¾ and closed at 89, the trader said.

Cash was being put to work on Thursday, he said. "Sidelined cash continues to get involved at levels just off their recent highs from last week, due to the recent light sell-off from yesterday's equity drubbing."

Said the strategist: "We've seen selective buyers and sellers, but no panic selling yet. So we appear to have disengaged to some extent from the equities."

Issuers move forward

Also impacting the picture on Thursday was Russia's smoke and smog, which have driven many traders and investors out of Moscow and affected demand for sovereign bonds.

But this didn't seem to stop the march to market for Bank of Moscow, which is planning an issue of CHF 200 million three-year loan participation notes. Price talk for the deal, via BNP Paribas and UBS, was set at the mid-swaps plus 373 bps area, a market source said.

The coupon is expected to be 4½%.

Another issuer planning a deal is Philippines-based food and beverage conglomerate Alliance Global Group Inc., with a dollar-denominated benchmark-sized issue of senior unsecured bonds due 2017. The Regulation S-only issue via bookrunner UBS could price this week.

And Sri Lanka has mandated HSBC Holdings, Bank of America Merrill Lynch and RBS for a planned issue of $1 billion in bonds, according to a statement on the Central Bank of Sri Lanka's website.

The issue is subject to market conditions and will likely come to market "later this year," the statement said.

Bradesco oversubscribed

In other news, the final book for the $1 billion 5.9% unsecured subordinated tier 2 notes due 2021 from Brazil-based lender Banco Bradesco SA (Cayman Islands branch) - which priced earlier this week at 99.622 to yield 5.95% - was $4.25 billion, a market source said.

This included the 10% greenshoe and involved 325 accounts. About 51% came from the United States, 29% from Europe, 10% from Latin America, 9% from Asia and 1% from others. Asset managers accounted for 39% while retail and private banks were 36%, hedge funds were 14%, pension funds were 6%, insurers were 3% and bank portfolio managers were 2%.

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