Trading quiet as eyes on Brazil's central bank; issuance seen dipping in second quarter

By Reshmi Basu and Paul A. Harris

New York, April 12 - Emerging market debt registered another slow day Monday as investors looked ahead to an anticipated interest rate cut by the Brazilian Central Bank this week.

"This is the slowest it's ever been," said a trader. "It's a yawner of a session."

"Across the spectrum, everything tightened up today, especially Argentina."

The JP Morgan EMBI index's spread to Treasuries tightened four basis points although the measure was down 0.22% at the end of session.

"Everyone is so obsessed with Treasuries," said the trader. "Everyone is moving ahead of the Fed."

"How the pipeline builds up will depend on the Treasuries in the second quarter," added a fund manager.

Meanwhile most investors agree that the emerging market story of the week will come from Brazil. The Monetary Policy Committee of Brazil's central bank will meet on Tuesday and Wednesday. Despite inflation concerns, the bank is expected to cut the benchmark Selic rate for the second time this year.

"We're expecting them to cut at least 25 basis points," said the trader.

In trading Monday, the Brazilian component of the EMBI index slipped 0.19% but its spread to Treasuries tightened by 7 basis points.

"If the cut is more than 25 basis points then it'll be interesting to see how the markets interpret the cut. Then the question becomes, who is Lula trying to please," said the trader.

The Brazilian benchmark C-bond was at 96.687 bid, 96.812 offered, down 0.13 at the close of Monday's session.

Issuance seen slipping in Q2

While the first quarter witnessed a strong flow of emerging market deals, U.S. interest rate hike concerns may hinder issuance going forward.

"We haven't seen any building of the pipeline in the last week," said the trader. "The job numbers just threw everything off. But the week before, geopolitical uncertainty was weighing on investors' minds."

"We're heading into a slowdown," noted the trader. "How much of a downturn will depend on the Treasuries."

"If you knew how the Fed will act, you could predict the second quarter," added the fund manager.

An emerging market analyst agreed that second quarter issuance would be slightly down from the previous quarter, given expectations about a Federal Reserve tightening.

"I think issuance will remain relatively high in Q2 but not as high as in Q1, which saw unsustainably high issuance in January," said the analyst.

"EM credits will still be able to tap the market, but it won't be as easy as it was early this year."

The analyst anticipated that spreads will be stable through the second quarter, with spreads widening in the second half of the year.

"U.S. interest rates remain low and speculation is now that the ECB (European Central Bank) could cut rates, so global monetary conditions should remain relatively accommodative this quarter, even if 10-year U.S. Treasury rates go up another 25 bps or so.

"I expect spreads to go up for the asset class as a whole; there may be some credit specific stories that push spreads up (Brazil is the most likely candidate), but I think the trend will be expectations of tighter monetary conditions pushing up EM spreads across the board," he said.

Another Kazakhstan bank to issue

Almaty-based ATF Bank announced plans to become the third Kazakhstan bank to issue bonds this year. The county's fourth largest bank joins Kazkommertsbank and Bank TuranAlem, which issued eurobonds in the first quarter.

On Tuesday and Wednesday, ATF Bank is planning to roadshow its three- to five-year $150 million eurobond (Ba1/B+).

The roadshow is expected to take place in Southeast Asia and Europe

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