Emerging market debt higher on equities, Treasuries; two corporates set talk

By Reshmi Basu and Paul A. Harris

New York, July 11 - Emerging market debt was a pinch higher Tuesday during a relatively light summer session.

After a considerable dry spell, the primary market saw two issuers set guidance for deals, which are set to price this week. Russian oil giant TNK-BP Finance SA set initial price guidance for a $1 billion two-part offering of five- and 10-year bonds. (Baa2/BB+/BB+). Talk for the five-year notes is Treasuries plus 187.5 to 200 basis points while talk on the 10-year notes is Treasuries plus 237.5 to 250 basis points.

Credit Suisse and Citigroup are the bookrunners for the Rule 144A/Regulation S transaction. BNP Paribas and UBS are joint managers.

And out of Brazil, utility company Energisa SA has set price guidance for a dollar-denominated offering of seven-year fixed-rate bonds at 10¾% to 11%.

Merrill Lynch is the lead manager.

EM higher on core markets

Positive performances by U.S. core financial markets gave a little pop to emerging markets debt. But nonetheless, the performance was "lackadaisical," according to Enrique Alvarez, Latin America debt strategist for think tank IDEAglobal.

A trader added that Tuesday's session was "uneventful."

During the session, the Brazilian bond due 2040 gained 0.50 to 125.70 bid, 125.80 offered. The Ecuadorian bond due 2030 was higher by 0.25 to 97.60 bid, 98 offered. The Russian bond due 2030 added 0.25 to 107.43 bid, 107.62 offered.

Overall, the tone was described as cautious optimism as the asset class begins to move away from risk aversion mode, which ransacked market sentiment from mid-May to June.

Since the June 29 meeting of the Federal Open Market Committee, many investors are hedging their bets that a pause in U.S. monetary policy is still in play. The market interpreted the accompanying statement to the Fed's rate hike decision to mean that the central bank may pause its current monetary cycle at its next meeting in August or at least is nearing the end of its tightening cycle.

Meanwhile, even though the sentiment is more optimistic than in previous weeks, not everyone is ready to reenter positions. Non-dedicated accounts were among the last to buy the emerging market story. They may also be among the last to come back.

"You have a divergence here," Alvarez said.

The more risk-averse players, who were prompted to enter the market at the tail end, because the "market was getting away," have since bailed out, he noted.

"And those are the ones that are going to be the hardest to lure back into the market," he observed.

And those investors will not come back until there is a little more evenness in the market. There are geopolitical concerns, such as the possible terrorist attack in India Tuesday, as well as a number of uncertainties, such as crude oil prices, that are creating apprehension. That means that it may be some time before crossover money comes back.

"The dedicated-type money is more convinced that over time we are going to see a renewed positive environment for the market, constituted essentially by the Federal Reserve pausing and then on a longer term basis, perhaps even reversing course on interest rates," he said.

The Federal Reserve's primary goal is to combat inflation and that means higher rates. But by the fourth quarter or the first quarter of 2007, a slowdown in the U.S. economy may take priority, which gives the Fed space to pause, said Alvarez.

Additionally he pointed out that this type of sentiment, which is beginning to take shape in investors' minds, contradicts what some investment firms are saying. Those firms are predicting short-term interest rates of nearly 6% by the end of the year.

"I think that's difficult because if you really buy into the 6% interest rate scenario, emerging markets have no business being where they are at this point," he remarked.

Nonetheless, there are mixed messages in the market, but Alvarez said he believes that dedicated players understand the medium-term outlook is positive because commodity prices have not really changed and fundamentals remain strong.

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