=DJ US Long Bond To Boost Emerging Market Debt,But Just A Bit
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By Shumita Sharma
Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--The successful return of the U.S. long bond will likely only work in favor of already rallying paper from emerging markets, even if to a limited extent.
The tight yield tagged on to the 30-year bond at its pricing Thursday created a wider spread between the new U.S. note and similar maturity paper issued by developing countries. Moreover, strong demand for the U.S. long bond signals that investors could be keen to snap up longer-dated bonds from other issuers as well.
The U.S. Treasury sold $14 billion in its first auction of a 30-year Treasury bond in four-and-a-half years at a yield of 4.53%, down from the 4.58% it was fetching before the auction deadline at 1 p.m. EST in the gray market, where securities trade before they are officially sold. Demand for the new bond was twice the amount on offer and the Treasury market rallied after the results were announced early Thursday afternoon as the bond sale proved more robust than most had expected.
Gautam Jain, a strategist at Barclays Capital in New York, said that with the auction causing the U.S. Treasurys yield curve to be a little flatter than before, the spread for debt from developing countries has risen in purely technical terms.
"The bonds in the long end should therefore rally in price terms to keep the spreads unchanged," said Jain, referring to the longer-dated bonds from emerging markets.
Soon after the results of the 30-year U.S. bond auction results were announced early afternoon Thursday, the risk premium on JPMorgan's Emerging Markets Bond Index Plus was trading at 211 basis points over Treasurys. That's just one basis point wider than the historical low close Wednesday of 210 basis points over Treasurys on the index, which tracks dollar-denominated debt from 18 developing countries.
However, bond prices rose, with Brazil's 2040 global bond - which serves as a benchmark for the broader market - bid 1/4 higher at 129 13/16 after trading in the red earlier in the session.
"It should also bring out more long-dated issuance from emerging markets," Sanjay Joshi, head of the global bonds team at London & Capital Asset Management, which has $450 million invested in global fixed income. "With this bond coming out, it will be a good idea for emerging markets to come out with more long bonds."
But the ripples that emerging market debt will feel in the aftermath of the much talked about U.S. long bond are likely to be few.
That's because the asset class has been rallying for more than two years, leaving little scope for a further narrowing of the record-low risk premiums investors are currently paying for debt from developing countries.
Furthermore, with emerging market sovereigns as well as corporates already active in selling long-dated paper, the fresh U.S. issue is unlikely to provide too much of an additional stimulus.
"It's a trend we are already seeing in emerging markets," said Cristina Panait, a Los Angeles-based analyst at Payden & Rygel, which has approximately $800 million invested in emerging market debt. "There's been lots of issuance of their own long bonds."
Last month, Brazil sold $1 billion in new 31-year bonds, orders for which were said to total at least 2.5 times the amount on offer, while Turkey raised $1.5 billion in 30-year global bonds.
Meanwhile, the government of Panama exchanged $1.06 billion of existing bonds for $1.36 billion of new 30-year bonds at a coupon that was the lowest for any of its outstanding debt, and Mexican state oil monopoly Petroleos Mexicanos (PEM.YY) sold re-opened its 2035 bond to sell an additional tranche of $750 million.
There's been a host of perpetual bond deals as well, especially from Brazilian corporates. On Thursday, people familiar with new bond deals said Brazil's biggest sugar and ethanol group, Cosan SA (CSAN3.BR), plans to re-open a recently issued $300 million perpetual bond and sell up to another $150 million of those notes. Last month, steel holding company Vicunha Siderurgica SA completed an issue of $450 million in perpetual bonds, a few days after Brazil's largest government-run bank, Banco do Brasil, raised $500 million and Malaysia's AmBank Bhd. sold $200 million in similar paper.
Barclays' Jain noted that issuers have been taking advantage of the low-cost environment - in which interest rates are low and there's enough money investors have to take on additional risks - to sell long bonds.
"If the Treasurys curve is flat, at least they don't have to pay the premium for a steeper curve," he said.
Despite the investor rush toward the new U.S. Treasury paper, the market's eagerness to chase high yields in emerging markets is unlikely to fade.
"There's no indication of a slowdown yet," said Payden & Rygel's Panait.
"Inflows were strong in January too, as we can see from the spread tightening," she said, adding that as long as global liquidity remains high, there's little threat to the asset class.
Market watchers have been saying that even though economic and credit fundamentals of developing countries are probably better than they have ever been before, the rally across all emerging market asset classes has a lot to do with the abundant liquidity in the global economy.
London & Capital's Joshi agrees. "Emerging markets are increasingly focused on the direction of the Fed Funds rate and recent comments from (former Fed Chairman) Alan Greenspan on the U.S. economy still remaining strong," he said.
-By Shumita Sharma, Dow Jones Newswires; 201 938 5240; shumita.sharma@dowjones.com |
