Spreads recoup some of Monday’s move as buyers step in; deal for First Abu Dhabi on hold

By Rebecca Melvin

New York, Feb. 6 – Emerging markets bond spreads tightened back in somewhat on Tuesday after a swift move wider on Monday in tandem with a steep selloff in U.S. stocks.

The market remained volatile in tandem with the broader markets on Tuesday, but there were better sellers than buyers in the market, a New York-based market source said.

The primary markets were pretty much quiet. First Abu Dhabi Bank’s planned five-year dollar-denominated Islamic bond was on hold as the issuer was “monitoring the markets,” a market source said.

The United Arab Emirates lender planned to issue a five-year note following meetings in London on Monday.

But Corporacion Andina de Fomento priced €1 billion of seven-year senior notes at mid-swaps plus 40 basis points despite the market headwinds, according to a market source. The source added, “I can’t imagine someone going out with the sudden increase in volatility.”

Tuesday’s session was marked by swings with no discernible trends. The S&P 500 stock index traded up 46.20 points, or 1.7%, to 2,695.14 after dropping 5% on Monday. Meanwhile, the CBOE Volatility index, which fell 20% after surging 115.6% on Monday, remained elevated.

The emerging markets bond market “held in well. There was a gain similar to stocks,” a New York-based market source said Tuesday.

The JPMorgan emerging bond index known as EMBI was back in on Tuesday to a spread of under 300 bps, after it dropped 0.3% – not overly dramatic – with spread widening of 17 bps, the source said. It was back up to 306.5 bps on Monday, which was one of the largest moves in several months.

“Emerging market bonds were due for a correction. The valuation was steadily increasing and there had been a steady fall in the spread, by one or two basis points at a time from early November of last year,” the market source said.

While Tuesday’s EMGI was not officially closed, the index was marked with a spread of 200, which was in by 6 bps.

It is a market that has the luxury or moving with U.S. Treasuries, given that 53% of the EMBI weighting is made up of investment-grade credits, or with riskier assets like stocks because it is 47% high-yield credit, the source said.

In corporate bonds, the JPMorgan corporate EM bond index, or the broad index, also notched a correction on Monday. The spread had widened 13 bps to 274 bps on Monday. But it is also evenly divided between high-yield and investment-grade credits, so the push-me, pull-me dynamic was at work, the source said.

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