Momentum pushes emerging market debt higher; Turkey issues $1.25 billion of 15-year bonds

By Reshmi Basu

New York, June 2 - Emerging market debt moved higher as investors put money to work on fear of being left behind. Meanwhile, the market easily digested a $1.25 billion offering from Turkey.

The Republic of Turkey priced $1.25 billion of 15-year bonds (B1/BB-) at 98.006 to yield 7.22% in a drive-by on Thursday.

The deal came at the tight end of revised price guidance of 7.22% to 7.24%. Initial guidance had been set at 7.30%.

The deal came as no surprise to the market, even as the French and Dutch chose to reject the E.U. constitution in referendums over recent days.

A sellside source, who had also been in talks with Turkey over a 15-year bond proposal, said the maturity made sense, given the look of the country's curve.

The source said that the French vote had been discounted and the country was waiting for Wednesday's "no" vote from the Dutch.

"The effect of the French vote really worried them at the beginning and the Dutch [vote] was just confirming the French [vote], he said.

"There was a time before this weekend that they could have gone to market, but they just wanted to wait and be fair to investors.

"I think that's why it went so well," remarked the sellside source.

Turkish spreads have widened around 50 to 75 basis points this year.

Lead managers were JP Morgan and Lehman Brothers.

Also pricing in the primary market, Thai Oil Public Co. Ltd. priced $350 million of 10-year notes (Baa1/BBB) at 99.884 to yield 5.114% or Treasuries plus 120 basis points.

The issue, increased from $250 million, came at the tight end of price guidance. Guidance had been set at 120 to 123 basis points.

The deal was four times oversubscribed.

ABN Amro and UBS Investment Bank ran the Regulation S offering of fixed rate notes.

EM debt higher on Treasuries

Emerging market debt continued to ride higher as Treasury yields in the United States remain below the psychological threshold of 4%. The yield on the 10-year note stood at 3.90% in late trading Thursday.

"As long as nothing changes in fundamentals in the EM market and Treasuries continue to rally, it's going to be positive," said the sellside source.

During the session, the Brazil C bond added 0.312 to 102 3/8 bid while the bond due 2040 surged 1.15 to 119.90 bid. Ecuador reversed its losing streak. The bond due 2030 rose 1¼ points to 80 bid. The Russia bond due 2030 gained half a point to 111 1/8 bid.

Obviously, lower rates are better for EM countries because of financing costs, remarked the sellside source.

"Investors are looking for yield. And the high-yield and high-grade markets have been somehow underperforming and it seems that EM market is the option for them.

"But the strange thing is that equity markets have been holding up. You have Brazil up almost 3% today [Thursday]. Mexico, more than 1% in the equity market. And Turkey issuing and still tightening," noted the source.

"This is great for them. They have come to the market. There has been supply, and since then the market will still hold onto levels.

"Fear of not being involved"

"Fear of not being involved" is what is spearheading the market's current strength, said a trader. In terms of fundamentals, emerging markets are standing above their counterparts, he added.

"Emerging markets are continuingly improving fundamentals. You have Argentina getting its ratings yesterday [Wednesday]. You have Colombia, for the first time in 10-years they are one vote away from pension reform. Panama passed its pension reform. You have Brazil still reporting good surplus numbers," he said.

"It's still general euphoria and improving fundamentals in the emerging market space."

Standard & Poor's raised Argentina's credit rating to B- on Wednesday, reflecting completion of its debt restructuring. Also that day, Colombia's senate constitutional affairs committee backed a diluted proposal by the government for reducing state pension benefits. Only one vote is needed for passage. On Tuesday, Panama's parliament supported the pension bill proposed by president Martin Torrijos' administration in a 43-30 vote.

But an emerging market analyst described the fundamental story as only "decent," but yet good enough to insulate the market from a fierce spread widening.

"I think there's definitely a lot less enthusiasm about EM fundamentals right now than there was at the beginning of the year, especially in light of weaker Brazil GDP numbers, higher Mexico unemployment, falling exports in many East Asian countries, and the E.U. referenda," he said.

"But that just means it might be more difficult for spreads to go all the way back to their lows, not that spreads won't fall at all.

"Heavy issuance might also restrain spread compression, but in general the scenario of very low UST yields and generally decent - not great, but decent - fundamentals should help EM spreads grind lower," he added.

Meanwhile, there is new money in the market, said the sellside source.

"The market seems to be tightening without much volume. But now that there is supply, it seems to be doing better.

"I guess people are betting on this market to continue for some time now."

The trader added that there are different players coming to the market.

"You have real money guys that continue to get in and put money to work, which is consistent," he remarked.

"And you have the momentum guys - the hedge funds or whatever, that basically cause some of the short-term fluctuations - that are basically causing momentum and buying here, but mostly liquid stuff, Argentina and Brazil.

"There is clearly some momentum trade going on, but the continued money into the space and steady holders from real money and pensions funds continues," he said.

Furthermore, the fear of a sell-off has long passed as the fear of increased rate hikes looks to be alleviated, remarked the trader.

"[Dallas Federal Reserve Bank president Richard] Fisher comes up and says we're in the 8th inning for rate increases. You have all the economic indicators that point to the economy not growing as quickly as people expected. Inflation is tame, so people feel a lot more comfortable long on credit.

Fisher suggested on Wednesday that rates might not move much higher on CNBC TV.

Nonetheless, the sellside source added that while a expectations of a sell-off have been put to rest, a piece of economic data in United States could always have the potential to drag down the market.

"For many investors, if it's volatile, it's better," he added.

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