EM softer as rate moves remain in focus; primary mostly quiet; Energija, Liquid price

By Rebecca Melvin

New York, July 7 – Emerging markets were softer on Friday as turbulence in the thinly-traded financial markets this past week continued to weigh on investors.

The U.S. dollar-denominated primary market remained quiet, although Liquid Telecommunications Holdings Ltd. priced a downsized $550 million of 8½% bonds five-year senior secured bonds on Thursday while in euros only Lithuania’s Lietuvos Energija UAB priced a deal of €300 million of 2%, 10-year senior green bonds on Friday.

The Lietuvos Energija deal (/BBB+) priced favorably at mid-swaps plus 120 basis points, which was tighter than talk for a spread of 130 to 135 bps, and it was three-times oversubscribed, a market source said.

The markets have not gotten back up to full speed since the U.S. Independence Day break earlier this week.

In established issues, markets were heavy on Friday, a trader said, with more sellers than buyers.

The holiday-shortened week kept market participants on rocky footing as a selloff in global government bonds pushed the yield on the German 10-year Bund to over 0.5% on Thursday, a level not seen in 18 months. In addition, oil prices continued to move lower, and the U.S. dollar edged higher.

Mixed fund flows

An outflow from hard-currency emerging markets bond funds of $568 million was registered in the week ending July 5, according to tracking firm EPFR Global. But there was also an inflow into local-currency funds of more than a $1 billion, resulting in a net inflow into all emerging markets bond funds of $693 million for the week ending July 5.

That compared to a larger $1.33 billion inflow into all emerging markets bond funds the previous week. And the last outflow in this measure of all regions/all currencies occurred way back in the fourth week of January.

A separate report showed $725 million was withdrawn from emerging markets fixed-income exchange-traded funds over the past week. The outflow was tied to the rise in 10-year U.S. Treasuries, which bounced to 2.369% on Thursday.

“The sell-off was mainly rates driven, with spreads, however, also wider on average,” a market source said. The fund flow figures are expected to “remain in focus next week,” the source said.

“No one knows where we will go from here,” a U.S.-based portfolio manager said, adding that the manager’s firm is always assessing its position.

Nevertheless, deals were expected to be launched and priced next week in Latin America and elsewhere, representing something of a reopening after curtailed action this past week, a New York-based analyst said.

Also next week, market tone will continue to take direction from central bankers and monetary policy, and many ears will be tuned into U.S. Federal Reserve chair Janet Yellen’s testimony before Congress on Wednesday and Thursday.

Qatar, rates, oil

In the geopolitical sphere, U.S. Secretary of State Rex Tillerson will travel to Kuwait on Monday following Qatar’s rejection of a list of demands for a Middle Eastern coalition.

The coalition, made up of Saudi Arabia, United Arab Emirates, Egypt and Bahrain, is “likely to announce further sanctions in the near future,” a market source said.

On Friday, the yield on the U.S. Treasury 10-year benchmark was up again at 2.386% as investors viewed strong June jobs data as a green light for U.S. central bankers to continue on their present course of reducing its $4.5 trillion portfolio of bonds and other assets and raising rates from their current historically low levels.

U.S. nonfarm payrolls for June rose by a seasonally adjusted 222,000 from May, and the unemployment rate ticked up to 4.4% from 4.3%, the Labor Department said Friday. That was better than estimates and it sent U.S. stocks higher on the day.

For 10-year emerging market sovereign paper, spreads were wider by an average of 10 bps on the week, according to a market source.

Meanwhile, with oil prices dropping there was underperformance in the Saudi Arabian credit space, which was wider by 30 bps on a Z-spread.

U.S.-traded crude oil prices fell $1.19, or 2.6% to $44.33 a barrel, extending overnight declines after data on Thursday showed that U.S. oil production last week rebounded.

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