Emerging market debt sees more stability; Mexico debuts 30-year local bond

By Reshmi Basu and Paul A. Harris

New York, Oct. 24 - Emerging market debt was mostly unchanged on a spread basis Tuesday as Ecuador gained momentum on preliminary poll results.

In the primary market, the Argentine Province of Buenos Aires (B3/B+) sold a $475 million offering of 12-year bonds at 97.417 to yield 9¾% via Merrill Lynch.

Also making a big splash, Mexico sold Latin America's first 30-year peso-denominated bond, which marked a highly successful deal for the country as it extends the maturity on its local debt. The bid to cover ratio was 6 to 1, showing that the deal was very much in demand, noted sources.

"There's definitely lot of interest in long-term Mexican peso-denominated paper," said Enrique Alvarez, Latin America debt strategist for think tank IDEAglobal.

"It actually came inside of the benchmark 20-year issue on a yield basis at 8.08% versus 8.11% to 8.15%, [for the 20-year bond]."

Important to note, the new deal established a 30-year point along the curve, which means that Mexico will be able to build up the curve between the 20- and 30-year points, he added.

Also noteworthy, this helped Mexico set up a long-term reference point for its domestic debt, which is something unheard of for a Latin American country.

Additionally, the auction's success highlights the popularity of local market deals.

Unless something changes radically on the external front such as the highly unlikely scenario of recession in China or oil prices topping $100 barrel, the investor zest for local deals will continue, Alvarez added.

Given how tight spreads are in the external debt market, investors will likely migrate into the domestic market and take the corresponding currency risk, he pointed out.

EM flat, Ecuador rallies

Overall, emerging market debt was flat to slightly tighter on a spread basis while softer on a dollar basis. The asset class failed to gather momentum on a lackluster performance by the Dow Jones Industrial Average index, according to market sources.

Trading volumes were light in anticipation of the Federal Open Market Committee interest rate-setting decision on Wednesday, according to a trader.

In trading, the bellwether Brazilian bond due 2040 gave up 0.15 to 130.25 bid, 130.30 offered.

Meanwhile Ecuador proved to be the outperformer of the session in response to preliminary poll results that suggest Wall Street favorite Alvaro Noboa is widening his lead over radical leftist Rafael Correa.

The official poll results will be released on Thursday.

During the session, the Ecuadorian bond due 2012 added 0.75 to 102.25 bid, 102.75 offered while the bond due 2030 gained 1.15 to 99.15 bid, 99.50 offered.

Investors are well primed for any encouraging news on the election front that provides them with an opportunity to get back into the game.

"There's already been a significant unraveling of short positions in Ecuador. I would suspect that people are going to be aggressive because it is a very outlying credit," noted Alvarez.

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