Emerging market debt steady on U.S. stocks; Pusan Bank sells new debt

By Reshmi Basu and Paul Deckelman

New York, March 7 - Emerging market debt traded cautiously Wednesday as it moved in tandem with the U.S. equity market.

In the primary market, South Korea's Pusan Bank sold $200 million of 10-year bonds at 99.763 to yield a spread of 109.6 basis points more than U.S. Treasuries.

The bonds are callable on March 14, 2012 at par. If the bonds are not called, the coupon steps up by 100 basis points over the prevailing U.S. five-year Treasury spread at the time of pricing.

JP Morgan and UBS Investment were joint managers for the deal.

Elsewhere, Russia's VTB Capital SA sold a £300 million offering of three-year bonds (A2/BBB+/BBB+) at par to yield 6.332%, according to a market source.

Barclays Capital, BNP Paribas, Deutsche Bank and HSBC managed the Regulation S sale.

JSC Vneshtorgbank, a Moscow-based state-run foreign-trade bank, will borrow the proceeds from the sale.

Returning to the broader market, emerging market debt saw a cautious session Wednesday, a day after the market climbed higher on the back of firmer global markets and a bounce in commodity prices.

Wednesday saw a morning rally, which ended with a sluggish afternoon session. EM credits ended the day, trading off the day's highs.

Among benchmark names, the bellwether Brazilian bond due 2040 gained 0.05 to 133.65. The Argentine discount bond due 2033 fell 0.25 to 113.75 bid. The Russian bond due 2030 gained 0.13 to 113.31 bid. The Turkish bond due 2030 increased 0.38 to 152.50 bid.

Latin America rests after bounce

A trader in Latin American debt said that there was "not really" very much going on his market on Wednesday, observing that things were "much quieter" than they had been on Tuesday, when spreads tightened markedly as part of an overall global financial market bounce back from the weakness seen in relatively risky sectors like equities and EM debt over the preceding week.

He estimated that after Tuesday's surge, spreads were perhaps 1 basis point wider, on average, but "nothing really stood out."

At another desk, Brazil's local-currency bonds were seen firmer, as investors correctly anticipated that the country's central bank would cut its benchmark lending rate for a 14th consecutive time in an effort to spur its sluggish growth rate.

The yield on the country's real-denominated zero-coupon notes due 2008, considered its benchmark issue, declined by 5 basis points to 12.1%, a record low. The bonds carry a spread of about 740 bps over the comparable U.S. Treasury issue.

Brazil's central bankers have been steadily lowering the nation's overnight lending rate from its peak level of 19.75%, hit in September 2005. In the latest action, announced late Wednesday, the bank, as widely expected by the financial markets, dropped the rate by another quarter of a percentage point to 12.75%.

Even with the reduction, Brazil's rates are among the highest in the world - and its real interest rate, excluding a 3% inflation rate, stands at around 10%, considered the highest in the world.

Brazilian policy makers feel confident that continued easings will not ignite a burst of inflation in Latin America's largest economy. They have set a 4.5% inflation target for the year - and so far, their predictions have been on target, with consumer prices up a relatively modest 2.91% in the 12 months through mid-February.

But while inflation has been restrained, economic growth has been as well. The economy grew just 2.9% in 2006 - the slowest of all Western Hemisphere economies, other than Haiti and El Salvador.

Asia builds on gains

Earlier, in Asian trading, bond spreads tightened modestly extending Tuesday's gains.

The Philippines local-currency benchmark bond due 2032 was not quite half a point firmer, quoted at 96.75 bid.

Low liquidity to prevail

On Tuesday, the asset class snapped a three-day losing streak for the asset class, following a week-long rout for global markets.

Since a week ago Tuesday, risk aversion cranked higher on nervousness surrounding the U.S. housing market, particularly the sub-prime mortgage sector and the unwinding of the carry trade.

Tuesday saw a reprieve as U.S. stocks traded higher in response to reassuring comments by Treasury secretary Henry Paulson who said that the rise in defaults at sub-prime mortgage companies will not hurt banks that make less risky loans.

But that recovery was short-lived as returns fell flat Wednesday on a dollar-basis, according to the JP Morgan EMBI+ index. Spreads widened by one basis point, unable to keep pace with the rally in U.S. Treasuries.

During Wednesday's performance, low liquidity continued to dominate trading, as investors remained sideline ahead of the release of U.S. payroll numbers due Friday and waited for further clues into the state of the carry trade.

However, sources have noted there is nothing within the asset class that has pressured the category. Instead the risks come from the external side.

Nonetheless, those pressure points will not vanish overnight, "which means that low liquidity may stay with us for the a few weeks," according to a market source

Still, one emerging market analyst noted that he believes the worse is over for now.

"I don't see spreads ratcheting in any time soon, and there's still a lot of indigestion from excessive issuance over the last few months, especially issuance of questionable single-B and CCC EM corporate deals," he said.

Recent low rated deals include the $1.4 billion two-part offering from Caribbean wireless telecommunications network operator Digicel Group Ltd.

Moody's Investors Service assigned a Caa2 rating to both tranches of eight-year senior notes. Fitch Ratings rated the notes at CCC+.

Another low-rated deal came from Moscow-based Locko-Bank, which sold a $100 million offering of three-year eurobonds at par to yield 10% in late February. Moody's assigned a B2 rating to the bonds while S&P gave a B-.

"I think we'll probably bounce around at current spread levels, probably with a bias towards tighter spreads over the next few weeks, but we're unlikely to test the recent spread lows any time soon."

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