Summer slowdown sets in for EM debt; Bahrain Mumtalakat plans roadshow; VEB to issue notes

By Christine Van Dusen

Atlanta, Aug. 3 - Spreads tightened a touch for emerging markets assets as real-money investors continued to hunt for yield on a fairly lackluster Friday with low volumes as the summer doldrums set in.

Even a better-than-expected employment report from the United States - showing that 163,000 jobs were added during the month - failed to inspire much activity.

"There's nothing going on in my markets," said a New York-based trader, who focuses primarily on Latin America. "[Petroleo Brasileiro SA (Petrobras)] paper, which has seen very deep Street and customer flows, managed to tighten a bit but was still lower by about a half-point, with flows much lighter than previous sessions this week."

Spreads could continue to tighten, but any further narrowing will be tempered by the ongoing economic crisis in Europe, a trader said.

"The global growth story will continue to be the Achilles heel, and continued fears could very well cause the existing uptrade and tightening to fade," he said.

In other news, emerging markets bond funds marked their eighth consecutive week of inflows with $783 million reported for the week ended Aug. 1, according to a report from data tracker EPFR Global.

In trading, some demand was noted for paper from Uruguay in light of the sovereign's recent upgrade by Moody's Investors Service, which makes the bonds eligible for investment-grade indices, according to a report from Barclays Capital.

Taking a look at corporate credit, names from Mexico and Russia may have experienced some positive news flow, but they're now "too rich," the bank said.

"We recommend taking profits on Mexican names like [Petroleos Mexicanos SAB de CV] to move into Chile for names like [Corporacion Nacional del Cobre de Chile], and moving out of names in Russia such as Novatek and TNK-BP Holding into similar beta peers in other regions," Barclays said.

Peers would include banks from Turkey, as well as Brazil-based telecommunications companies.

Mumtalakat, VEB deals ahead

In deal-related news, Bahrain Mumtalakat Holding is organizing a roadshow in Kuala Lumpur for its planned issue of Malaysian ringgit-denominated notes, a market source said.

CIMB and Standard Chartered are the bookrunners for the Islamic bonds.

Mumtalakat is a real estate company based in Bahrain.

And Russia-based lender Vnesheconombank (VEB) is planning to issue ruble- and Swiss franc-denominated notes, a market source said.

No other details were immediately available on Friday.

EM funds see inflows

Emerging markets bond funds took in $783 million for the week ended Aug. 1, according to EPFR Global.

During the week ended July 25, the funds reported inflows of $393 million. That was a significant drop from the previous week, when the funds saw inflows of $935 million.

This week, the inflows were divided roughly three-to-one in favor of funds with hard currency mandates, said Cameron Brandt, director of research with EPFR.

Year-to-date, emerging markets bond funds have attracted more than $28 billion.

"Fund groups that have struggled since the second quarter attracted fresh interest - and money - in late July ahead of meetings by the European Central Bank and U.S. Federal Reserve that investors hoped would authorize additional quantitative easing," EPFR said. "Yield remained the key goal for many investors."

EM credit universe broadens

Foreigners' holdings of local currency bonds in emerging markets have climbed to $70 billion, year-to-date, Barclays said.

"Issuance, primarily from non-sovereign and corporate issuers, has also steadily broadened the EM credit universe," the report said.

Although market-watchers remain somewhat bearish, the weekly inflows into emerging markets bond funds suggest that investors are beginning to abandon their emerging markets shorts and hedges, Barclays said.

"In EM credit, this is evident in the outperformance over the past weeks of credit default swap indices and some single-name CDS - such as Russia or Turkey, which were used, we think, as broader macro hedges - both versus bonds and broader risk markets," the report said.

Asia misses out on flows

The flows into local bonds have been concentrated in Latin America and emerging Eastern Europe, the Middle East and Africa as opposed to Asia.

"All of these observations suggest that positioning is not as defensive as it likely was a few weeks ago which, together with less robust valuation metrics, makes the markets more vulnerable to disappointments in data," Barclays said. "Hence, we think the summer may not remain as quiet as recent market activity seems to suggest and we believe risk and reward in cyclical EM assets generally tilts to the downside at this stage."

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