Emerging market debt rallies hard on soaring U.S. equities; Ecuador snaps upward move

By Reshmi Basu

New York, Oct. 12 - Emerging market debt forged ahead Thursday, inspired by a stellar performance in the U.S. equity market.

On Thursday, the Dow Jones Industrial Average moved above 11,900 for the first time and spreads on the 10-year Treasury note came down.

Amid that supportive backdrop, emerging markets posted higher numbers, breaking the prior session's softer tone, which saw the JP Morgan EMBI+ index fall by 0.13%.

At session's end Thursday, the JP Morgan EMBI Global index was up 0.20% while spreads were narrower by two basis points.

High beta credits such as Argentina, Venezuela and Turkey led the charge. Argentina saw its spreads tighten by 14 basis points while spreads for Venezuela and Turkey each narrowed by four basis points.

Meanwhile Brazilian bonds saw higher prices Thursday as the positive fundamental picture outweighed the Oct. 29 presidential election story, according to a trader.

The latest poll released Wednesday showed that Brazilian voters prefer president Luiz Inacio Lula da Silva to Wall Street favorite Geraldo Alckmin.

After the election, the transition is expected to pretty fluid, which is "sort of putting election jitters to rest", noted a market source.

During the session, liquidity was light due to the local Brazilian holiday, but the country is expected to play catch up to Thursday's rally on Friday.

In the secondary, the bellwether Brazilian bond due 2040 gained 0.45 to 130.86 bid, 130.90 offered.

Ecuador gives up gains

But while the rest of emerging markets debt rode higher on U.S. equities, Ecuador was unable to sustain its recent rally on the resurrection of election jitters ahead of Sunday's presidential election and further rhetoric from presidential hopeful Rafael Correa's potential finance minister regarding debt restructuring.

In trading, the Ecuadorian bond due 2030 lost 0.70 to 91.45 bid, 91.60 offered.

In recent sessions, Ecuador has seen a bounce back on JP Morgan's recommendation that investors go long on the country's bonds coupled with radical leftist Correa's apparent loss of momentum in polls.

Upbeat mood, says analyst

Overall, the mood in emerging markets is still fairly upbeat, according to an emerging market analyst, who noted that there are a few obvious exceptions.

There are some concerns including the drop in oil prices, which is worrisome for some of the weaker oil credits, in particular Venezuela, he said. However, many of the oil exporters have largely shrugged off the oil price decline.

"Ecuador is another credit where there's obviously some concern, but even in Ecuador there's been some firming in sentiment over the last few days," he added.

EM in sync with equities

In recent months, emerging market debt has been trading in tandem with the U.S. equity market, but this move mirrors the upbeat sentiment, according to the analyst.

"In general, I wouldn't say the market is overly attached to equities - stronger U.S. equities simply reflect bullish sentiment about the medium-term outlook, and that has boosted risk appetite for everything else, including EM," he said.

"High yield spreads have tightened by 20 bps just since the beginning of the year, so EM is just getting caught up in the stepped-up bid for risk."

But he cautioned that there are some downside risks from the technical side.

"It's possible, though, that you could see new issuers get a little too greedy and put a floor on spreads, even if U.S. equities continue to rally into November," he said.

Still, he observed that deals that have already priced or that are coming soon have or will be digested relatively easily.

"But there's some risk that other issuers could come out of the woodwork and upset the technicals," he warned.

Indonesia's PLN up in trading

Meanwhile Perusahaan Listrik Negara (PLN) was one of those recent deals which saw a healthy bid. On Wednesday, the company priced $1 billion of notes in two tranches (B1/BB-/Perfindo A) in what was called the biggest Indonesian high-yield transaction ever.

In the secondary, both of the tranches have traded up.

Its five-year notes were spotted at 100.75 bid, 101.25 offered, up from its issue price of 99.382 while its 10-year tranche was also quoted at 100.75 bid, 101.25 offered, up from its issue price of 98.976.

UBS led the Rule 144A/Regulation S transaction.

In the primary market Thursday, two more corporates priced deals.

Russian Nomos Bank, sold a $125 million offering of 10-year bonds (Ba3//B+) at par to yield 9¾% via UBS.

And government-owned lender Land Bank of the Philippines sold a $150 million offering of 10-year lower tier II notes (//BB) at par to yield 7½%.

The deal came in line with price guidance of a yield in the 7½% area.

Deutsche Bank managed the Regulation S transaction.

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