Liquidity 'awful' for EM after Fed remarks; most spreads widen; sellers outpace buyers

By Christine Van Dusen

Atlanta, June 20 - In the wake of Federal Reserve Chairman Ben Bernanke's comments on quantitative easing and interest rates, emerging markets investors went on a selling spree and spreads widened.

"It's a bloodbath," a New York-based trader said. "The downdraft spanned a bloodletting of anywhere from 2½ points to 6 points, depending on the credit and maturity."

The Markit iTraxx SovX CEEME ex-EU index spread on Thursday started the day at 241 basis points over Treasuries, wider by 23 bps. The Markit iTraxx Crossover index spread - seen Wednesday at 446 bps over Treasuries - widened to 476 bps on Thursday.

"Bernanke's comments at the FOMC have seen US Treasuries selling off strongly this morning," a London-based analyst said. "Unsurprisingly, our markets are considerably wider, in particular Turkey and Central and emerging Europe, which are both anywhere from 15 bps to 30 bps wider in the sovereign space."

Credit default swap spreads for Turkey were 25 bps wider on Thursday.

"The Middle East and North Africa are both anywhere from 15 bps to 30 bps wider in the sovereign space," the analyst said.

About 80% of the day's flows came from sellers, a London-based trader said.

"There's some nibbling, but clearing it can't stand up in the face of what the Street and bigger clients have," he said.

Dubai's 2043s were 5 bps wider on the day at 89, then moved to 87 near the end of the European session.

"Ouch," he said. "Amazingly busy, and at times scary, day courtesy of events overnight and the further realization from the market that the punch bowl is being drained, or at least will be drained. Not really a tremendous shock. However, it was enough to upset the apple cart again in EM."

Lat-Am in focus

Very few Latin American credits traded with any volume on Thursday, the New York-based trader said. Brazil-based Petroleo Brasileiro SA (Petrobras) saw some action for its 2021s, 2023s and 2043s while Brazil-based Vale SA's 2022s got some attention.

"Vale's 2042s were super-quiet," he said. "We are now back, once again, to searching for the proper clearing levels for risk as selling was greatly exacerbated today."

Private banking flows fluctuated, as accounts couldn't decide whether to buy on weakness or sell.

"When you have a defined asset class such as this - with a target on its back - that has lost all sense of trading within its technicals, credit metrics and global markets, finding that clearing level becomes extremely trying, and we are seeing that."

Some bonds tighten

Still, some bonds managed to tighten on Thursday. On that list was Abu Dhabi Commercial Bank's 2018, sighted at 97.62 bid, 98.37 offered, about 3 bps tighter on the month.

"It was squeezed. Not anymore," a trader said. "Traded two-way this morning."

Majid Al-Futtaim Holdings' 2017 were trading Thursday between 108 and 109, about 11 bps tighter on the week.

"Sukuks seem to be holding up better," the analyst said.

Buyers for Batelco

Buyers were seen for Bahrain Telecommunications Co.'s 2020s, the London trader said, while Emirates NBD's perpetuals printed down 2½ points at 91.

"Very good action," he said. "Sellers of all Dubai Electricity and Water Authority bonds, with the 2020s last down at 1141/4, about 17 bps wider on the day."

Saudi Electricity Co.'s 2022s saw some two-way activity at the 103 to 104 level. And International Petroleum Investment Co.'s 2041 traded 121½ bid, 123 offered after touching 127¾ just the day before.

"With the volatility on the 'risk free' rate, so too must this market properly adjust," a trader said. "That means many of these more recently issued corporate bonds may never see the light of par again."

Qatar, Bahrain widen

Qatar's 2022s were trading at about 107, with the belly of the sovereign curve about 5 bps to 7 bps wider.

"Even seeing some paper come out on previously sticky, squeezed names," he said. "Asia, of course, is leading the charge with bonds coming out thick and fast. Hugely active here."

Bahrain's 2022s were seen Thursday between 101½ and 1021/2, about 110 bps wider on the month.

Curves steepen

And Dolphin Energy's 2019s were quoted Thursday at 107½ bid, 108½ offered, about 20 bps wider.

"The long end has re-priced lower with curves steepening," a trader said. "Liquidity was, for the most part, awful. The question is, where do we go from here? Having misplaced my crystal ball a while back I can only say I think this market that was once a fabulous buy on dips may not be a sell-on-rallies-type of market."

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