Emerging market debt soars as Treasuries gain; Homex places $200 million of 10-year notes

By Reshmi Basu and Paul A. Harris

New York, Sept. 21 - Emerging market debt soared in response to a U.S. Treasuries rally and an upsurge in oil prices.

The Federal Reserve may have indicated more rate hikes lie ahead in Tuesday's statement. But the market is not hearing any of it, said sources.

A trader said that both Treasuries and emerging markets have shrugged off the Fed statement and are assuming that the Fed will have to pause, especially if Hurricane Rita unleashes devastation on the Gulf States.

"They [the Fed] may say inflation is a concern, but the market is pricing in a pause," he said.

EM up on Treasuries

Treasuries gained Wednesday. By the close of trading, the yield on the 10-year note stood at 4.19% from Tuesday's close of 4.25%.

During Wednesday's session, oil prices ratcheted up on supply concerns, which was seen as boding well for oil-producing credits.

The JP Morgan EMBI+ Index was up 0.49%.

At session's close, the Brazil bond due 2040 was higher by 0.85 at 120.95 bid. The Russia bond due 2030 was better by three-quarters of a point at 114¾ bid. And the Venezuela bond due 2027 surged 2.35 to 116.30 bid.

The Brazilian component of the EMBI was up 0.74% while its spread was four basis points tighter against Treasuries. Colombia's portion of the EMBI was up 0.81% while its spread narrowed by 10 basis points. Venezuela's component gained 1.26% while its spread was 11 basis points tighter.

"EM is really tight," said the trader. "This performance is pretty unreal."

Meanwhile higher beta names in Latin America saw a large rally, said Enrique Alvarez, Latin America debt strategist for IDEAglobal.

He added that he is surprised that the market continues to grind tighter, believing that the market is way overdone given the complicated external environment in Latin America.

"There are people that are very confident that the Fed would have to pause at some point in time no matter what it said yesterday [Tuesday]," he said, adding that Hurricane Rita may prove them right.

Flows into emerging markets are helping the market outperform, said sources.

"Globally liquidity is essentially just chasing yields. It has been chasing yields for quite a while," noted Alvarez.

And one reason for that chase is that major stock markets outside of emerging markets are not performing well.

"People are convinced that we are in a continued cycle of contained interest rates," adding that that sentiment is making EM more attractive because of its higher yield.

Alvarez said that the critical issue for emerging markets is the state of the U.S. economy and how oil affects growth and inflation.

If a U.S. slowdown turns into a recession or stagnation, than Latin America will see some sort of market correction, he added.

Homez issues $250 million notes

In the primary market, Mexico's Desarrolladora Homex, SA de CV sold an upsized offering of $250 million in 10-year notes (Ba3/BB-) at 99.653 to yield 7.55%.

Credit Suisse First Boston was the bookrunner for the Rule 144A with regulation rights issue. HSBC was the co-lead manager.

Also, the Arab Republic of Egypt sold $1.25 billion of 10-year bonds (Aaa/AAA) at 99.659 to yield 4.493% via Morgan Stanley.

The bonds are guaranteed by the United States via the U.S. Agency for International Development.

The notes were several times oversubscribed and widely distributed to international investors, according to press release by the Egyptian finance ministry.

Also, the State Export-Import Bank of Ukraine (Ukrexim) revised price guidance on its $150 million offering of seven-year loan participation notes to 6¾% to 6 7/8% from the 7% area on Wednesday.

The books are expected to close on Thursday.

Credit Suisse First Boston and UBS are joint bookrunners for the Regulation S offering.

The notes come with an investor put if state ownership of the bank falls below 50% plus one share.

Ukrexim Bank is 100% owned by the Ukrainian state.

Ukraine has been undergoing some political volatility. Ukraine's president, Viktor Yushchenko, and his former prime minister, Yulija Tymoshenko, have both said that they are willing to talk to each other about forming a new government.

Yushchenko said Wednesday he would talk to Tymoshenko, whom he sacked along with the rest of the government on Sept. 8 in response to infighting in the cabinet.

Yuri Yekhanurov, a political ally of the president, was appointed the acting prime minister pending official approval from the parliament. On Tuesday, Yekhanurov's confirmation was three votes short of the 226 needed for approval in the 450-seat parliament.

According to a market source, whoever becomes prime minister will only be seen as caretaker until the next election in March 2006. The assumption is that there will be no economic or political reforms until then.

A failed vote may be bad but it does not change the sovereign's credit, said the source. There is more political uncertainty, but that should increase the risk premium of the country's external assets.

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