Emerging market debt sees spreads widen on Turkish troubles; Hang Seng Bank sells $450 million notes

By Reshmi Basu

New York, June 23 - Emerging market debt trekked lower Friday, feeding off investor jitters about Turkey's ability to access financing in an increasingly risk averse environment.

In the primary market, Hong Kong's Hang Seng Bank Ltd. sold a $450 million offering of 10-year floating-rate notes (Aa3 expected) at 99.869 with a coupon of Libor plus 30 basis points via HSBC.

Friday's opening saw spreads widen on poor liquidity as negative sentiment from Turkey continued to pressure emerging markets.

The two previous days saw spreads kick out, triggered by concerns over Turkey's sizable current account deficit.

On Friday, the ongoing devaluation of the Turkish lira sparked an early morning bout of spread widening for the country. As Turkey began to unwind, so did the rest of the external debt market.

At the start of the trading day, hedge funds and proprietary trading accounts were buying protection throughout the market. And those accounts became better sellers of protection at wider spreads, according to an analyst note. Meanwhile real money accounts remained sidelined.

For the session, the JP Morgan EMBI+ index was down 0.50% while spreads widened by two basis points versus U.S. Treasuries.

Funds lose $1.99 billion

Since mid-May, risk aversion for emerging markets has ratcheted up on the back of inflationary worries in the United States.

Local equity markets have seen the blunt of the correction. However, emerging market debt has not been spared. Emerging markets bond funds posted their sixth straight week of outflows, according to EmergingPortfolio.com Fund Research.

Emerging market equity funds saw $1.99 billion or 0.9% of their total assets leave the class for the week ending June 21. Latin America equity funds saw the worst of the pull out as 1.8% of their total assets were withdrawn, even though these funds saw the best weekly performance among the emerging markets fund groups, rising 7.3%.

Focusing on Fed

Looking to the coming week, all eyes will be on the Federal Reserve. The market is expecting the Federal Open Market Committee to lift the fed funds target rate by 25 basis points to 5¼% at its next meeting on Thursday. And sources have said that they expect to see signals of more hikes to come.

"The market is nervous, but I think the worst is behind us in terms of a broad market sell-off," said a trader.

"The sell-offs will become more country specific as investors look closely at fundamentals versus spreads," he added.

European and African countries that have the largest deficits such as South Africa and Turkey are expected to see more turbulence while Latin America and Asia may see more calm ahead, noted a market source.

Nonetheless, relief rallies will be accompanied by profit taking, noted the source.

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