Emerging markets debt sees lack of conviction ahead of U.S. CPI numbers; Turkey issues $1.5 billion

By Reshmi Basu and Paul A. Harris

New York, Sept. 14 - Emerging markets debt saw little direction Thursday leading up to the release of Friday's Consumer Price Index data in the United States.

In another uneventful session, softer U.S. Treasuries and equities failed to inspire the asset class to move in one direction or another. At session's end, the JP Morgan EMBI Global index was down 0.09% while its spread widened by one basis point versus Treasuries.

The morning was described as bullish as traders were seeing a lot of cash being put to work, according to a sellside source. But that tone changed as U.S. Treasury yields rose on a stronger than expected U.S. retail sales report and a drop in initial jobless claims.

Recent sessions have seen a lack of conviction as investors contend with declining commodity prices and a somewhat murky outlook for U.S. monetary policy on the back of inflation concerns.

That lack of direction carried into Thursday's session amid a vacuum of any country-specific catalysts.

Money may have poured back earlier in the session but that is because no one knows what to do, commented the sellside source.

"They still have a lot of money. The problem here is that there's not so much risk aversion but a lot of money in people's hands. They don't know where to put it," noted the sellside source.

Emerging market debt has been hanging in there, supported by the search for yield, which will be a major theme in the near-term.

Nonetheless, Friday's session could see some direction, depending on which way CPI falls. If CPI delivers a surprise, then the market will once again be rattled by the inflation story, noted sources.

Turkey sells paper

In the primary market, the Republic of Turkey sold $1.5 billion of new benchmark bonds (Ba3/BB-/BB-) Thursday as part of its debt buyback program.

The deal priced at 99.152 to yield 7.12% or mid-swaps plus 183 basis points.

Of the proceeds, $330 million was used for cash while the remaining portion was used to retire $1.055 billion of the higher-coupon global bonds, whose maturities range from 2006 to 2010.

Given the small amount of cash raised, Turkey will still be an active issuer in the coming months, according to a market source.

Citigroup and Goldman Sachs were lead managers for the Securities and Exchange Commission registered bonds.

Overall, Turkey's portion of the EMBI index was mostly unchanged from the previous session.

Hutchison adds to euro curve

Elsewhere, Hong Kong-based conglomerate Hutchison Whampoa Ltd. priced €1 billion of 10-year notes (A3/A-/A-) at 99.592 to yield mid-swaps plus 65 basis points.

The size of the deal is not a significant amount, according to trader who focuses on Asian fixed income credits.

He added that there is always a little bit of a concession for issuing in euros since they do not trade as much.

This marks the third euro-denominated issue for Hutchison Whampoa, whose bonds in the currency mature in 2013, 2015 and now 2016.

"So they are starting to get a curve established in euros," noted the trader.

HSBC was the bookrunner for the Regulation S transaction.

Bank of India upsizes

Elsewhere, Bank of India sold an upsized offering of $240 million in 15-year upper tier II bonds (Baa2/BB-) at 99 5/8 to yield mid-swaps plus 138 basis points.

The deal, increased from $200 million, priced below revised price guidance of 140 to 145 basis points over mid-swaps. Guidance had already been lowered from 145 to 155 basis points.

The issue is non-callable for 10 years. If not called, the coupon steps up to six-month Libor plus 238 basis points.

There were more than $1.2 billion orders in the book.

Barclays Capital, Citigroup, Deutsche Bank and HSBC were bookrunners for the Regulation S transaction.

Market tone okay, says trader

The trader noted that the market is becoming quite efficient and the general tone is okay.

"A lot of the deals that are coming are basically sitting right on their theoretical curves," he noted.

While the market is reasonably well supported, it is not cheap. Additionally, the trader observed that deals are getting done, but are stalling in the secondary market.

Korean banks bring deals

Recently a number of Korean banks have tapped that capital markets. On Wednesday, Shinhan issued $350 million in 30-year hybrid tier I securities. On Monday, Hana Bank sold $400 million of 10-year notes.

"They have been trading okay, but not giving people fantastic total return on the break," noted the trader.

"Shinhan notes maturing in 2015 had tightened a little going into the deal. Shinhan's new paper came at 205. It's now wrapped around there: 208 bid, 204 offered," he commented.

Meanwhile Hana Bank came at a 119.3 basis points over Treasuries. The trader spotted the paper Thursday at 119 bid, 115 offered.

"That market is quite efficient. There are reasonably well-established lower tier II credit default swaps. There is a pretty well established curve.

"There is so much lower tier II five-year callable paper out there right now that pricing is not particularly difficult," he noted.

Philippines sees volatility

On the Asian sovereign front, the trader noted that the Philippines has been very busy because of its debt exchange. And that exchange has resulted in a reasonable amount of volatility as the long end sold off a little bit.

"But the net result is that not too much has changed. The curve normalized Wednesday and that carried on on Thursday," he noted.

The trader predicted that there would be an increasing concentration of activity around the benchmarks.

"They will likely continue to try to exchange their shorter-maturity paper into this new 2024 amortizing bond," he remarked.

The Philippines bonds due 2031 last traded at 103.625 bid and were seen wrapped around that at 103.50 bid, 103.75 offered.

They traded as high as 104.375 bid on Thursday in Asia, but then faded a little.

The low, earlier in the week, was around 102.25 bid.

The bond due 2016 was spotted at 108.125 bid, 108.625 offered.

Ecuador stabilizes

Prior sessions have seen Ecuador's bonds slide on election jitters as Rafael Correa, former finance minister and friend of Venezuelan president Hugo Chavez, has turned up the populist campaign rhetoric and has also advanced in recent polls.

"Ecuador was more contained today [Thursday]," noted Enrique Alvarez, Latin America debt strategist for think tank IDEAglobal.

"Whoever wanted to liquidate or put down a short has been able to do so in the course of the last few days," he said, but added that Thursday's session does not signal a bounce but more of a pause for Ecuador.

Many investors are concerned about the political landscape leading up to the Oct. 15 election.

Furthermore, how election-bound Ecuador will trade in the next month will depend on how the electoral polls evolve, according to Alvarez.

The polls are showing that there is very high level of undecided voters. And those voters tend to come from the highland provinces, which are more poverty stricken. Those voters are more inclined to chose populist electoral platforms, a negative for the market.

Leading up to the election, polls will more likely show Correa gaining support, resulting in lower bond prices.

"There will be some point in time when you see people venture back into the paper as a high-yield investment again, but I think we're still far away from that," he noted.

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