Emerging market debt gains as Treasuries dip below 4%; Panama mixed on reform setback

By Reshmi Basu and Paul A. Harris

New York, June 22 - Emerging market debt prices continued to jump higher while investors paid close attention to a setback for pension reform in Panama.

Meanwhile, the primary market was active as Turkey and several corporates issued new paper, mostly tapping the euro-market.

The Republic of Turkey priced an offering of €650 million of seven-year bonds (B1/BB-) at 98.841 to yield 4.95% via Credit Suisse First Boston and Deutsche Bank.

The euro-deal priced very tight, according to a buyside source, noting that locals and Europeans were the main participants.

The comparable dollar-denominated Turkish bond due 2012 was trading at a 6.4% yield, added the source.

Also pricing were corporates from Brazil, Hong Kong, and South Africa.

South African petrochemical company Sasol Ltd. sold €300 million of five-year bonds (Baa1/BBB) at 99.823 to yield mid-swaps plus 77 basis points.

Books closed with more than €1.5 billion in orders.

ABN Amro and Dresdner Kleinwort Wasserstein ran the Regulation S transaction.

Hong Kong-based conglomerate Hutchison Whampoa priced a €1 billion issue of 4 1/8% 10-year notes (A3/A-/A-) at 99.75 to yield 4.156%.

The bond priced at a spread to mid-swaps of 93 basis points, inside of the mid-swaps plus 95 basis points price talk.

During Asian trade Wednesday, Hutchison bonds tightened four basis points, despite the announcement of the new issue, said a market source.

"The deal was about three to four [bps] tighter from the break," said a trader.

"When they announced they were doing a euro deal as opposed to a dollar deal and it was just going to be contained in a 10-year space, the market rallied about five or six basis points," he said.

ABN Amro, Deutsche Bank and HSBC were the bookrunners.

And on the dollar side, Brazil's Banco BMG SA sold $175 million of five-year bonds at par to yield 8 ¾% via Morgan Stanley.

EM debt up, Panama mixed

Emerging market debt continued to make strides Wednesday as U.S. Treasuries broke the 4% barrier.

"It's a surprise that Treasuries continue to stay below 4%," said the buyside source.

"But on the other hand, as long as we don't see growth picking up in the U.S., there is nothing that can send the Treasuries off, other than technical reasons," such as flows.

"We need to see some growth and some reassurance that we are not getting into a slowdown," added the source.

The yield on the 10-year note stood at 3.94% in late trading down from Tuesday's 4.05%

Emerging market debt rode higher on the Treasuries rally, said sources.

"The market is extremely strong, maybe on the back of Treasuries," said a sellside source early in the session.

Nonetheless, the session was still fairly quiet, said the buyside source.

"There was really no real news out there today [Wednesday] except for Panama, where we had a bit of a disappointment.

"They had to stop the recommendation of the social security reform, which was passed a few weeks ago," the buyside source added.

Unions and business leaders have been decrying the reform package, arguing that laborers would be the hardest hit. Panama has seen more than two weeks of street protests.

President Martin Torrijos, who has been suffering from low approval ratings, will hold off on implementing the more controversial revisions of the far-reaching pension reform package as he negotiates with dissenters such as union leaders.

"That's a negative if they are not able to reach an agreement on that soon," noted the buyside source.

During the session, Panama bonds were mixed. The Panama bond due 2020 was unchanged at 112 bid while the bond due 2027 added 1/8 of a point to 119¼ bid. The bond due 2029 lost 0.15 to 123.85 bid.

Ecuador keeps dropping

In other news, Ecuador bonds continued to sell off in response to Monday's downgrade by Standard & Poor's. The ratings agency lowered the country's long-term sovereign credit rating to CCC+ from B-.

The move by S&P was unsurprising, noted the buyside source.

"We were pretty negative on Ecuador even before the president [Lucio Gutierrez] was ousted in April. And after that, even more so," said the source.

The source added that the downgrade was expected because of the new changes to the Fiscal Responsibility Law and in particular, modifications to the use of the oil fund FEIREP.

"I think they are going to be in some liquidity and solvency issues by the end of the year. It really raised the question as to whether they are able to finance themselves," remarked the buyside source.

During the session, the Ecuador bond due 2012 lost 1¾ points to 93½ bid.

"The Ecuador downgrade has obviously affected the price of Ecuador, but it has not hit anything else," said the sellside source.

"The rest of emerging markets are very strong."

Brazil quiet - for now

Meanwhile, the political turmoil in Brazil has simmered down for now, said sources.

But the buyside source warned that there might still be some flare-ups stemming from the corruption charges leveled against president Luiz Inacio Lula da Silva's administration.

One positive development that may come out of the political drama is the reshuffling of the cabinet, said the source.

"That needs to be done in order for the government to get more cooperation from the non-coalition parties. You have to give them something," noted the source.

The lack of evidence to back up allegations made by Roberto Jefferson, a Labor Party deputy, has calmed the market, remarked the buyside source.

"You never know. Brazil is like a soap opera."

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