Emerging market debt flat to lower as investors eye CPI data, Malaysian banks join pipeline

By Reshmi Basu and Paul A. Harris

New York, May 13 - It was a wishy-washy day for emerging market debt Thursday as investors anxiously awaited Friday's consumer price index data for clues as to how swiftly and violently the Federal Reserve will act to raise interest rates.

"We had a lot of volatility, which took us higher and lower, but not a lot of clarity," said a trader. "In the end we hadn't done too much.

"We'll wait and see what happens Friday with the numbers."

The general view is that depending on April's consumer price report, the Federal Reserve may raise interest rates at its next policy meeting in late June.

Some investors have surmised that emerging market debt may sink lower, given that no one can nail down what the impending Fed action entails.

One strategist said he could not say whether the market had found the bottom of its range since there are so many unknown variables. But he is looking for bargains.

"I don't know how much more the carry trade can come off? I think there's risk of further weakness," said the strategist.

How the market reacts will depend on how strong the U.S. inflation numbers are. Even then, unexpected moves by the Fed can knock down investors.

"Let's say we get something so that market is absolutely positively sure that the Fed is going to move in June," surmised the strategist.

"Now, let's say we get something really strong that makes someone go, 'Oh, maybe they have to do 50.' Well, that's not in the market."

"In a transitional period like this as you are moving into a tightening phase, you kind of know you are in a bear market and the question is how big is the bear and how quickly does it run at you.

"And you can always be surprised unpleasantly by those kind of developments."

The JP Morgan EMBI Index fell 0.12% Thursday. Its spread to Treasuries tightened by 11 basis points to 513 basis points.

Latin America trade shifts into neutral

Trading for the most part was flat for Latin American sovereigns.

The Brazil benchmark C bond was at 87.375 bid, 87.625 offered in late afternoon.

"That's in the middle of the range that we traded Wednesday afternoon," said a trader. "So you could say it's pretty much unchanged."

The Brazil 11% bond due 2040 was unchanged at 85 bid, 85.50 offered.

In early morning, the 2040 bonds were softer just before mid-day at 85.56 bid, 86.19 offered, from 85.65 bid on Wednesday.

The Brazilian component of the EMBI Index was up 0.32%. Its spread to Treasuries tightened by 36 basis points to 735 basis points.

Meanwhile, Venezuela's 9¼% bond due 202 was at 78.75 bid, 79.25 offered.

"Basically unchanged," commented the trader.

And Ecuador continued to surge.

"There are rumors of a couple of deep-pocket buyers," added the trader. He saw Ecuador's bond due 2030 up 1.5 to 1.75 points on the day.

The Ecuador component of the EMBI Index rose 1.27%. Its spread to Treasuries tightened by 56 basis points to 917 basis points.

Both Ecuador and Venezuela had been strong performers Wednesday, helped by rising oil prices.

Ecuador's component of the EMBI Index gained 2.59% Wednesday while its spread to Treasuries tightened by 69 basis points.

Most Brazilian corporates were trading flat despite AmBev posting weaker first quarter profits.

"Nothing has been moving too much," said an analyst. He added that bargain shoppers have made bids on Brazilian corporates.

Malaysian banks build pipeline

Three banks added to the emerging markets corporate pipeline including Malaysia's ninth largest lender, Southern Bank.

The bank is expected to issue $150 million of lower tier two subordinated debt. Goldman Sachs is running the books.

Public Bank is planning to launch $250 to $350 million 10-year bonds via Barclays Capital and Citigroup.

And Hong Leong Bank Bhd is considering entering the market with a $150 million bond offering,

The additions came even though issuers from other countries have been pulling or postponing deals in recent sessions.

Tuesday Russia's OAO Mobile Telesystems put on hold its plans to sell $600 million 10-year notes due to unstable market conditions.

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