January 20, 2017 / 3:48 PM / a year ago

EM sovereigns swamp dollar market ahead of Trump

LONDON, Jan 20 (IFR) - The EM bond market burst into life on Wednesday as five sovereign US dollar deals hit the screens as issuers sought to get in ahead of Donald Trump’s inauguration.

Just a day after Trump’s comments sent the US greenback into retreat, underscoring fears of increased volatility ahead, Philippines, Turkey, Colombia, Dominican Republic printed deals, while Argentina announced a trade that was completed the following day. Chile, too, raised money through a peso-denominated Euroclearable trade on Wednesday.

“This has got to be a record day [for sovereigns],” said Sean Newman, a senior portfolio manager at Invesco.

While the market swallowed the US$14.7bn of supply given investors have healthy cash balances, some fund managers said it was a bit frustrating that it came all at once.

“It was a little bit too much supply in a single day. Some issuers wanted to get out of the way before Trump takes over. Some market participants might think that as a risk factor, and that was the reason for this rush. The vast majority (of the new issues) aren’t doing that great.

“There was too much supply. Hawkish remarks on interest rates in the US and US Treasury yields and Bunds under pressure doesn’t help,” said Sergei Strigo, head of emerging markets debt management at Amundi.

Another investor said the amount of deals caused some administrative headaches in dealing with the investment banks. “There was some confusion about which orders were in which book and it was difficult to get colour from salespeople at the banks.”

But, generally, accounts said there were no problems in assessing the merits of each deal. “Given that all the recent US dollar issuers already have existing curves out there valuing the new deals wasn’t a big stretch on resources,” said Max Wolman, EM portfolio manager at Aberdeen Asset Management.

Instead, the biggest casualties may have been the borrowers themselves as some deals got bigger books than others and some paid higher concessions.

“All things being equal, when there are a lot of deals coming on the same day inevitably the new issue premium will be higher,” said Jonathan Mann, head of EM debt at BMO Global Asset Management, though he added spreads are tighter than at the start of the year so from that perspective it made sense to issue.


Argentina paid the biggest concession of the five sovereigns with a 30bp premium in spread terms, according to a banker away from the deal, for its US$7bn dual-tranche offering, which was made up of five and 10-year notes.

“Argentina is a good example of an issuer that was disadvantaged by having five different sovereigns on the same day,” said the banker, who pointed out that three other sovereigns were also targeting 10-year issues, adding further pressure.

Indeed, Argentina priced at the wide end of its 6.875%-7.00% guidance range on its US$3.75bn 10-year, despite garnering a combined book of more than US$21bn.

The buyside appeared satisfied with pricing and many in the market said Argentina looked attractive compared to other EM and high-yield debt.

“We still see Argentina as undervalued and relatively cheap at this level,” said Yong Zhu, a senior portfolio manager at DuPont Capital Management.


Turkey was another sovereign that had to offer a healthy premium, paying 20-25bp on its US$2bn March 2027 notes issue - though leads reckoned it was more like 10-15bp, arguing that the relatively low cash prices on the relevant outstanding bonds need to be taken into account.

Turkey’s story has been become trickier in recent weeks, as the country has become engulfed by a series of negative economic and political headlines, which have led the lira to be one of the worst performing currencies this year.

A central bank meeting, scheduled for January 24, is seen as pivotal in determining not only the monetary policy response to the situation but also as a guide to how independent the institution is given the government’s recalcitrant position on rate hikes. Some economists think a minimum 200bp interest rate increase is needed to stem the lira’s fall.

Many in the bond market, therefore, thought it unlikely Turkey would issue before that central bank meeting or before a Fitch review, due out on January 27, which could see the sovereign lose its last investment-grade rating.

The deal means that Turkey has raised one-third of its funding requirements for the year, and assuaged any concerns about its ability to access markets.

With the dam now burst, more sovereign borrowers are likely to emerge, with Egypt the next in line with a deal expected next week. Investors, though, are wary.

“The risk is that a flurry of supply, at a time when valuations already appear a bit stretched, could eventually lead to some indigestion in the market,” said Delphine Arrighi, EM portfolio manager at Old Mutual Global Investors.

“We have already seen a wave of profit taking this week and a more severe correction could take place if supply increases even more.”

Reporting by Sudip Roy and Paul Kilby additional reporting by Robert Hogg; editing by Matthew Davies

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