EM improves as inflows return, currencies stabilize; Vale gains; Turkey steadies

By Rebecca Melvin

New York, July 25 – Emerging markets debt improved on Wednesday with strength attributed to some funds flowing back into the sector and to a continuation of stabilizing currencies amid subsiding U.S. dollar strength, New York-based emerging markets fixed income strategist Michael Roche of Seaport Global said.

Emerging markets bond funds saw some $250 million flow back into the sector, and funds have had consecutive weekly inflows this month, which is better compared to emerging markets equities.

Brazil’s Vale SA bonds were stronger after an upgrade to investment-grade status by Moody’s Investors Service.

The Vale 6¼% notes due Aug. 10, 2026 were seen at 109.57 early Wednesday compared to 109.00 at the market close on Monday.

Spreads on this bond have compressed some 20 basis points so far this month, which has outperformed the 17 bps compression in the J.P. Morgan IG emerging markets corporate bond index in the same period.

Meanwhile, Turkey’s sovereign bonds stabilized after a slide on Tuesday, with that curve coming in 1 bp. That compares to a widening out on Tuesday of 25 bps.

Turkey was the worst performer in emerging markets sovereign debt on Tuesday, with a loss in its dollar bond index of 1.65%. It was a dramatic fall, Seaport’s Roche said.

Vale upgrade

Vale strengthened on Wednesday after being vouched for by Moody’s, which upgraded the credit rating to Baa3, reflecting the metal mining company’s improved credit metrics and completion of an expansion project that gives it more of a cost advantage over competitors that will support profitability.

“The company possesses the higher quality iron ore that is favored by China in its efforts to reduce air pollution,” Roche said.

In addition to having higher quality iron ore, the company has completed a recent expansion with new mines and has an ongoing commitment to a program to reduce net debt.

“That combination proved to be an irresistible force,” and along with it “management has been given full marks,” Roche said about Moody’s upgrade.

The Vale 6¼% bond due 2026 is a Seaport recommended bond. This Vale paper offers investors value as it is part of the intermediate part of the curve compared to the rest of the curve, Roche said.

Nevertheless there are reasons to remain cautious and those include the liabilities from the Samarco dam collapse, which are not fully accounted for and for which an agreement with Brazilian authorities remains unconfirmed, and in addition, iron ore prices remain volatile even though they have rebounded from their lows in early 2016, credit research firm Gimme Credit wrote in a note on Tuesday.

“Vale’s positive specific news is the tailwind and the headwind is the excess supply over demand situation,” Roche said.

Meanwhile, the pulp and paper sector has been outperforming amid global net short supply. And Brazil’s tie up of pulp and paper rivals Fibria Celulose SA and Suzano Papel e Celulose SA creates the world’s largest producer. Seaport Global recommends the Suzano-Fibria 2027 notes, which has come in 49 points since the end of June.

Turkey steadies after drop

The average yield spread paid by Turkey’s sovereign bonds is 431 bps over the U.S. EMBI Global Diversified Index. That is another 12 bps wider compared to the last blow out for Turkey that occurred on July 10 when Erdogan rattled investors by naming his son-in-law as the nation’s new finance minister.

Tuesday’s blow out occurred after the country’s central bank kept its interest rates unchanged instead of raising them as many expected to fend off inflation. The bank’s decision to leave its target interest rate unchanged at 17.75% resurrected fears that President Recep Tayyip Erdogan is imposing undue influence on monetary policy.

But on Wednesday some stability returned, Seaport Global’s Roche said.

© 2015 Prospect News.
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