EM bankers greet Fed taper with delight as January volume prospects improve
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Emerging Markets

EM bankers greet Fed taper with delight as January volume prospects improve

Bankers in the emerging markets are eying potential January issuance volumes with glee after investors responded well to US Federal Reserve’s decision to begin shrinking its monthly asset-buying programme from $85bn to $75bn.

“EM investors spat the dummy on May 22, but this time round the market’s accepted that tapering is going to happen and they have confidence that it’s going to be gradually and slowly introduced,” said one emerging markets syndicate banker in London."The reaction has been a non-event, which in itself is great news."

Far from the realisation of the fears of another knee-jerk sell off, some high yielding names in the emerging markets have even rallied. DEWA’s 2018s were trading at 99.5-100 on Wednesday but had moved up to 100-100.25 on Thursday. Emaar Properties’ 2019s were at 108.75-109.75 but on Thursday moved up to 109.5-110.

The buying was not uniform though — some of the higher rated sovereign names were trading weaker. Qatar’s 2019s and 2020s sold off around 0.125% in cash price terms and its 2042s were down by about 0.25%. But overall the reaction was muted enough to reassure both bankers and investors.

Some bankers were optimistic enough to say that the news could even prompt an opportunistic issuer to take advantage of the good market before the end of the year, although nobody that EuroWeek spoke to on Thursday morning appeared to have any mandates up their sleeves.

“If the Fed had made the move a week ago, we could have seen another small wave before the end of the year,” said the syndicate official. “Now we’re a bit too close to Christmas — a lot of investors have left for the year.”

He said he expected nothing from Asia, but theoretically issuers from Europe or the US with docs in place could use the better sentiment of the next 24 hours to print.

EM bankers are expecting January to be even busier than they thought a week ago, now that the prospect of the first tapering move in that month has been taken out and the reaction to the Fed’s move on Wednesday night was calm. Bankers said that the increased visibility will encourage issuers to print in Q1 rather than waiting for Q2 as some had planned. 

“We’re very bullish for next year as a whole now,” said one emerging markets origination official in London. “A dovish taper gives us no reason to be pessimistic. We’re now expecting a repeat of 2013s volumes in 2014.”

Total emerging market issuance stands at $478bn for the year according to Dealogic data, setting a new record for the asset class. CEEMEA is at $180.5, only $400m off last year’s record of 180.9bn.

Poland, Romania, Turkey, Kenya, Lithuanian and Slovenia are among the names expected to come to market in January.

The start of tapering should do little to alter many issuers’ plans to front loan bond issuance in 2014. A 50bp rise in bond yields would leave most borrowers still facing lower than normal funding costs, said an EM analyst. Nor are CEEMEA sovereigns, expected to be the biggest issuers in the January rush, likely to see appetite tail off.

“CEEMEA sovereign debt is one of the few asset classes on which investors are bullish,” said Bartosz Pawlowski global head of EM strategy at BNP Paribas in London. “Firstly, because CEEMEA sovereign bonds are historically cheap versus US high yield and other developing asset classes, and because net CEEMEA sovereign issuance next year could well be negative.”

But a second syndicate official in London was more cautious. He pointed out that the Fed will have been carefully monitoring the market’s reaction to its move and that it can still speed up or slow down asset purchases.

“The reaction today has possibly bolstered the Fed’s confidence in tapering,” he said. “We just have to hope now that they stick to the plan they’ve set out.”

Muted secondary response

EM buyers seem to have learned valuable lessons after the Fed’s decision not to start tapering in September caught them off guard.

“A lot of investors who traded on the basis of that September rally following the surprise delay got burned,” said one EM analyst in London. “There was buying then profit taking and the market was extremely choppy in the subsequent days. Now many emerging market accounts have given up trading on the event, so there’s not the same wave of movement this time around.”

EM sovereign curves have also steepened across the board in recent months, eroding the space for buyers to bet on further steepening and making such positions much more costly to run. But trading there bodes well for a new and more constructive approach to emerging markets among the global investor base.

“The initial reaction has been for currencies to trade independently of one another, which is what they’re supposed to do,” said Pawlowski. “The market seems to have abandoned the risk-on/risk-off attitude and has returned to trading on fundamentals.”

The Mexican peso strengthened, while the Brazilian real weakened. The Turkish lira sunk to its lowest level since September, but some central CEEMEA sovereigns saw their currencies rise. This supports strategists’ calls for a return to detailed credit analysis and differentiation between emerging market countries rather than an indiscriminate hunt for yield.

“Investors have moved on from focusing on FOMC meetings and the inevitable decline in central bank balance sheets,” said Pawlowski. “Instead they’re focusing on which sovereigns they like and which ones they don’t. Our biggest hope for 2014 is that buyers abandon the risk-on/risk-off mantra in the bond market.”

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