Emerging market debt steady despite foiled terrorist attempt; EM sees inflows of $280 million

By Reshmi Basu and Paul A. Harris

New York, Aug. 10 - Emerging market debt bounced back Thursday, following a minor knee-jerk reaction to the discovery of a terrorist plot targeting overseas flights from Britain to the United States.

Global financial markets initially buckled on the news, but then regained composure as the day progressed. U.S. stocks moved higher as oil prices slid, overriding the news of the foiled plot.

Emerging market debt closed out Thursday on a stable note in thin trading.

On Wednesday, the asset class had erased some gains towards the end of the day on the back of equity weakness. Spreads on the JP Morgan Global EMBI index had tightened by four basis points as hedge funds and proprietary trading desks added more risk.

Thursday's session saw spreads come in by two basis points.

During the session, the bellwether Brazilian bond due 2040 lost 0.15 to 129.65 bid, 129.75 offered. The Russian bond due 2030 gained 0.25 to 109.625 bid, 110.25 offered. And the Turkish bond due 2030 gave up 0.63 to 147.875 bid, 148.375 offered.

Meanwhile one market source noted the long end of the Venezuelan curve has been trading on the sloppy side, but there appeared to be no visible reason as to why.

In trading Thursday, the Venezuelan bond due 2027 was down 1.20 to 123.35 bid. 123.75 offered.

Elsewhere, Colombia traded with a bearish tone Thursday. During the session, the Colombian bond due 2033 slipped 0.75 to 134 bid, 135.25 offered.

The previous session, the Republic of Colombia (Ba2/BB/BB) reopened its 12% global TES bonds due Oct. 22, 2015 to add $300 million equivalent via a modified Dutch auction. The issue priced at 115.789 for a yield of 9.35%.

Deutsche Bank and Morgan Stanley were the bookrunners for the transaction.

One investor did not play in the deal, noting that the Colombian market has rallied so much that she would prefer to sit this one out in anticipation of a pullback.

"I don't think it was expensive to where the market is right now," said the source.

"I just think we had a tremendous run in that market in particular. And I'm expecting a breather and maybe I'd add on weakness," she commented.

EM sees $280 million inflows

In other news, emerging market dedicated funds saw $280 million of inflows for the week ending Aug. 9, reported EmergingPortfolio.com Fund Research. This marks two straight weeks of money coming into the asset class, following the prolonged sell-off seen in mid-May and June.

In recent weeks, emerging market debt has rallied on expectations of a halt in monetary tightening in the United States. On Tuesday, that prediction came to fruition as the Fed paused for the first time after 17 consecutive rate hikes.

The market initially jumped on the news. But since the accompanying statement to the decision was more dovish than anticipated, investors will continue to remain sensitive to U.S. economic data over the next six weeks up until the central bank's next meeting in September.

Market sources have noted that while the odds are stacked towards a continued pause, an unexpected number could add some market jitters.

In weeks to come, investors will see such releases as the consumer price index, housing starts and gross domestic product.

"The market has taken the dovish statement in a positive way," remarked the buyside source.

"We haven't seen a huge rally, but sentiment continues to be positive."

Essentially, emerging market investors will turn their focus to how the U.S. growth story plays out.

"If there's a sign of recession in the United States, I think that is going to be bad for everybody," noted the investor.

For the short-term, the market is expected to see a decent trade until the end of September. But the quandary is how much more upside can there be since spreads are trading near all-time tights.

"We're getting close to the tights of the year again, so I think that will be an important level to cross," observed the source, adding that she does not see significant tightening from here onwards.

Moreover, the asset class does not necessarily need a positive trigger to push it forward. With summer in session, low liquidity coupled with positive sentiment and small trades will bolster the market.

On the pipeline front, the investors said this was the right moment for issuers to tap the capital markets. Recent issues have seen healthy demand. And August will see a windfall of cash on amortization and coupon payments.

"People are willing to put cash to work through September-end maybe," remarked the buyside source.

In the last couple of years, the month of September has seen rallies. Last year, the market saw a significant run-up as participants looked to protect quarter-end profits.

"You saw all that tightening reversed in October," concluded the investor.

"A lot of people are basing their assumption on that we are going to be fine through September, try not to disturb quarter-end and then give back some of the gains in October and see how it plays out."

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