Emerging market debt dips ahead of Bank of Japan meeting; Penerbangan issues price guidance

By Reshmi Basu and Paul A. Harris

New York, March 8 - Emerging market debt continued its slide Wednesday but the intensity of the sell-off appeared less pronounced compared to previous sessions.

In the primary market, Penerbangan Malaysia Bhd. talked its $1 billion offering of 10-year global bonds (A3/A-) at a spread of 35 points to 38 points over mid-swaps.

The deal is expected to price before the end of the week.

CIMB Bhd., Deutsche Bank and Morgan Stanley are managing the bond sale, which is being conducted via Rule 144A and Regulation S.

The issuer is 100% owned by Khazanah Nasional Bhd., the investment-holding arm of Malaysia. Penerbangan is the majority owner of Malaysia's biggest airline, Malaysian Air.

The Malaysian Federation will guarantee the notes.

EM awaits Bank of Japan

Emerging market investors remained skittish ahead of Thursday's Bank of Japan meeting. The asset class saw prices fall, but the sell-off was less intense than in recent sessions, remarked sources.

Nonetheless, the "correction continues," noted a trader.

During the session, the Brazilian bond due 2040 defied the trend to add 0.15, ending at 129.45 bid, 129.55 offered.

But the Russian bond due 2030 shed 0.25 to 110 bid, 110.25 offered. The Venezuelan bond due 2030 lost 0.35 to 125.05 bid, 125.45 offered.

"It's only Wednesday. And two of the market's biggest events are yet to happen," said a second trader, referring to the conclusion of the Bank of Japan meeting on Thursday and the release of U.S. non-farm payroll numbers this Friday.

Investors are awaiting the outcome of the Bank of Japan's two-day consideration of policy which may result in the end of five years of ultra-loose monetary policy. Japan reported Friday that January's core consumer price index increased 0.5%, which was the first time that prices have risen for three straight months in almost eight years.

Prime minister Junichiro Koizumi has openly said that the Bank of Japan should be careful in deciding whether to alter its policy stance.

A change in policy could have major implications for the yen carry trade, noted a market source, adding that the market is re-adjusting as to how much risk it will take on in the face of higher global interest rates

"Japan is a really big issue," said Enrique Alvarez, Latin American debt strategist for IDEAglobal.

"People are placing a lot of responsibility of this movement on the very low-carry trade coming out of Japan.

"If that is modified in any sense, people are saying that we will have a lot of flows back into Japan," he said.

However, he noted that Japan's central bank does not really have that much space to move, hence, fears of a sharp unwinding of the carry trade may be greatly exaggerated.

Nonetheless, many have said that recent the bout of U.S. Treasury weakness has provided an opportunity for investors to cash in.

But one emerging market analyst disagreed, saying that this is more than just profit taking.

"There are a number of investors who believe that the end of easy money is going to mean a long period of adjustment for emerging markets.

"Sovereign external debt should perform better than much of the rest of EM markets, but local markets and EM equities markets are clearly in trouble, as they were the beneficiaries of such robust inflows for the last year or so.

"Even external debt, though, is not immune to trouble, especially because EM is still trading rich to U.S. corporates," he added.

Ecuador's state of emergency

In other developments, Ecuador's president Alfredo Palacio declared a state of emergency in the Amazone provinces where workers' strikes are resulting in the loss of 50% of state-owned Petroecuador's daily output.

The situation is expected to become worse, more prolonged and spread out, noted an analyst.

During the session, the Ecuadorian bond due 2015 lost 1.25 to 101.25 bid, 102.25 offered while the bond due 2030 fell 0.80 to 95 bid, 95.90 offered.

Brazil cuts Selic

And after the close of Wednesday's session, Brazil's central bank cut its Selic rate by 75 basis points to 16½%.

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