Emerging market debt reaps gains; Dah Sing sells $150 million bonds; funds see $328 million outflow

By Reshmi Basu and Paul A. Harris

New York, May 25 - Emerging market debt moved higher Thursday, buoyed by a number of factors such as supportive economic data out of the United States and a rally in emerging market currencies.

Also good overtones from a letter by Federal Reserve chief Ben Bernanke helped spreads tighten amid decent trading volumes, a day after the market saw spreads widen by double digits, according to market sources.

In the primary market, Hong Kong-based Dah Sing Bank Ltd. priced a $150 million issue of 10-year lower tier 2 subordinated notes (//BBB+) with a three-month Libor plus 75 basis points coupon at 99.87 on Thursday.

The guidance was Libor plus 78 basis points.

HSBC was the lead manager.

Thursday's performance gave a reprieve for emerging markets amid a volatile week, in which concerns over U.S. inflationary pressure, U.S. economic growth and commodity prices derailed most core markets.

This week alone saw a whopping $328 million leave the asset class, as measured by outflows for the week ending May 24, according to EmergingPortfolio.com Fund Research.

The market opened firmer and, unlike previous sessions, sustained gains throughout the day.

Furthermore, market sentiment saw an upswing after the release of U.S. first quarter gross domestic product data, which showed a significant upward revision, but fell below Wall Street expectations.

"And then Bernanke's comments in the afternoon really allowed us to take another leg up," according to a buyside source.

In a letter addressed to Rep. James Saxton of New Jersey, the Fed chief fielded questions left unanswered after his congressional testimony on April 27.

Bernanke said that indexes, such as the consumer price index and the producer price index, exaggerated the amount of inflationary pressure. He added that monetary policy must be "forward looking."

As a result, emerging markets saw a better tone. During the session, the spread on the JP Morgan EMBI+ index tightened by 12 basis points.

"EM currencies are strong across the board and so are bonds," remarked the buyside source.

Across the curve, Latin America moved higher. At session's end, the Brazilian bond due 2040 had gained 1.75 to 123.05 bid, 123.15 offered. The Argentinean discount bond due 2033 surged 2.25 to 93.10 bid, 94 offered. The Colombian bond due 2033 added 1.75 to 129.75 bid, 130.75 offered.

Meanwhile, the Philippines bond due 2025 moved up one point to 125 bid, 125.75 offered. Finally, the Russian bond due 2030 was up by 0.13 to 107.25 bid, 107.375 offered.

More data to come

However, Thursday's rally may be short-lived. The release of the U.S. personal income and consumption index for April could unnerve the market on Friday, noted a market source.

Furthermore, the market will see liquidity dry up as the summer season takes hold. And this may not bode well for the asset class, according to the buyside source.

"The market is still skittish. You had a nice rally, but there's still more downside risk than upside risk.

"It starts off with Bernanke and the Treasury department, which goes into bonds, which goes into equities, which goes into risky assets," he noted.

Elections coming up

In a year where much of Latin America is set to vote, political stories have taken a backseat to U.S. interest rate worries.

In Brazil, president Luiz Inácio Lula da Silva is still the favorite to beat out Geraldo Alckmin of the opposition Social Democracy Party, for the presidency, according to a new Datafolha poll, which was released Wednesday evening.

And this Sunday, Colombian president Alvaro Uribe is expected to easily win his country's first-round presidential election.

"In general, emerging markets have been bystanders to the global trade," the buyside source told Prospect News.

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