Massive outflows from EM bond funds; spreads tighten; Russian lenders set July roadshows

By Christine Van Dusen

Atlanta, June 28 - Emerging markets bond funds suffered significant outflows during a volatile and weaker week for the asset class, given continued concerns about instability in Brazil, liquidity challenges in China and the likelihood that the Federal Reserve will soon taper its bond-buying program.

Outflows from emerging markets bond funds more than doubled from the previous week, totaling a whopping $5.6 billion for the week ended June 26, according to a report from data-tracker EPFR Global.

About $2.4 billion of this week's outflows were from funds with a local currency mandate, $2.6 billion from hard currency funds and the rest from blended currency funds.

"Fund flows data was very negative this week," a London-based analyst said. "Developed markets saw $17.7 billion of outflows."

Still, some emerging markets assets fared better on Friday. Credit default swap spreads for Turkey were 4 basis points to 5 bps tighter.

"Relatively muted activity," she said.

The Markit iTraxx SovX CEEME ex-EU index on Friday tightened 10 bps to Treasuries plus 230 bps, while the Markit iTraxx Crossover index spread - seen Thursday at 483 bps - moved in to 467 bps on Friday.

"FOMC members stressed yesterday that markets have overshot tapering expectations, and US Treasury yields continue to fall for the third day in a row," the analyst said.

Emerging markets debt has entered a "transition period to an environment of less ample global liquidity," according to a report from Barclays. "This transition may be more disruptive than anticipated. We think that if and when immediate concerns about redemptions fade, the stage will have been set for a more value-driven market, creating opportunities to exploit fundamental dislocations."

Liquidity low in Lat-Am

Bonds from Latin America suffered from low liquidity on Friday, a trader said. That's expected to continue into next week, given the Thursday holiday in the United States.

Activity will also likely be limited for assets from Turkey and the Czech Republic after political uncertainty there unnerved the markets, according to a report from Commerzbank.

"Although day-to-day market volatility continues with every fresh move up in the 10-year Treasury yield, we think that a stronger US economy will ultimately mean stronger markets, even if in different - more pro-cyclical - asset classes," according to a report from Commerzbank. "Continuing volatility, however, emphasizes that the excessive portfolio inflow-driven sovereign bond rally in EM is over."

Middle Eastern bonds move up

In trading on Friday, Bahrain Mumtalakat Holding Co.'s 2015s traded at 101.37 bid, 102.37 offered, following Thursday's level of between 101 and 102, a trader said.

Qatar's 2042s, which saw good interest on Thursday between 106½ and 107½ - were seen 107½ bid, 108½ offered on Friday.

Dubai-based DPWorld's 2017s on Friday moved to 107.43 bid, 108.43 offered after being sighted earlier in the week between 106 and 107.

And Dubai-based Dolphin Energy's 2019s were spotted at 109 bid, 110 offered after trading at 106¾ bid, 107¾ offered earlier this week.

Gazprombank roadshow ahead

In deal-related news, Russia's Gazprombank OJSC will set out on July 2 for a roadshow to market an issue of Swiss franc-denominated notes, a market source said.

Credit Suisse and UBS are the bookrunners for the deal.

In April the Moscow-based lender announced plans for up to $4 billion of notes this year.

Probusinessbank to market notes

Russia's OAO Probusinessbank has mandated Credit Suisse, Societe Generale and BofA Merrill Lynch as bookrunners for a dollar-denominated issue of notes that will be marketed during a roadshow, a market source said.

The marketing trip for the Regulation S transaction will begin on July 1.

Probusinessbank is a lender based in Moscow.

Senegal could issue

Market sources were whispering on Friday about Senegal, which could issue as much as $500 million of bonds for the purpose of funding infrastructure projects.

The deal could come to the market this fall.

VakifBank in focus

Sources were also talking about the upcoming issue of notes expected from Turkey's Turkiye Vakiflar Bankasi TAO (VakifBank).

Though the Istanbul-based lender initially considered a dollar-denominated issue of notes, VakifBank is now pondering an issue denominated in Turkish lira, the source said.

In April, the bank priced a $600 million issue of 3¾% five-year notes at 99.432 to yield mid-swaps plus 300 bps via BofA Merrill Lynch, Citigroup, Commerzbank and Deutsche Bank in a Rule 144A and Regulation S deal.

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