Emerging market debt soars on technicals; El Salvador reopens 2035 bonds

By Reshmi Basu and Paul A. Harris

New York, April 19 - Emerging market debt soared Wednesday despite the pullback in U.S. Treasuries which saw the yield on the 10-year note cross back above the 5% threshold. Instead the JP Morgan EMBI Global index grinded to a record low of 189 basis points during intra-day trading before closing out the session seven basis points tighter than Tuesday's close at 191 basis points versus Treasuries.

On the primary front, El Salvador retapped its 7.65% bonds due 2035 to add $400 million in a drive-by Wednesday.

The issue priced at 240 basis points more than Treasuries. The tap, increased from $300 million, came at the tight end of price guidance. Guidance was set at 240 basis points to 242 basis points earlier Wednesday.

This brings the total size of the deal to $775 million.

In secondary trading, the 2035 bond was spotted down 0.75 to 101.25 bid, 102.25 offered due to supply, noted a market source.

EM soars on technicals

Emerging market debt was resilient Wednesday as higher beta credits scored bigger gains despite the 10-year Treasury yield moving beyond 5%, according to market sources.

A combination of factors such as higher commodity prices, stronger performances in the equity market and a lower CBOE Volatility Index helped support the market, said one market source.

But many credited Wednesday's performance to the technical story.

Investors are increasing their appetite for risk as cash from buybacks, coupons and amortizations is being put to work.

With commodity prices so high, credit instruments have been the traditional recipients of the resulting large flows of cash. And that scenario is being built into the market, noted Enrique Alvarez, Latin America debt strategist for IDEAglobal.

"Very high crude oil prices are going to generate again very high excess amount of petrol dollars that are going to be to be recycled," he added.

And as one source put it, emerging market bonds changed into floaters, essentially ignoring Wednesday's Treasury performance.

Meanwhile there were better sellers in Argentina and Brazil, according to the source, adding that the short base on the Street seems to still have a large presence.

During the session, the Argentinean discount bond due 2033 gained 0.10 to 99.75 bid, 99.85 offered while the Brazilian bond due 2040 added 0.10 to 128.35 bid, 128.40 offered,

Colombia, Ecuador and Turkey were among the session's best performers. The Colombian bond due 2027 moved up 1.75 to 111 bid, 113 offered. The Ecuadorian bond due 2015 was higher by 1.25 to 106.25 bid, 107.25 offered.

And the Turkish bond due 2030 jumped 1.25 to 152.25 bid, 152.75 offered.

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