Emerging market debt bullish on inverted Treasury yield curve; two corporates to price

By Reshmi Basu and Paul A. Harris

New York, Feb. 6 - Emerging market debt moved higher as the 30-year U.S. Treasury bond outperformed its peers.

In the primary market, two deals are expected to price.

Out of Korea, the Export-Import Bank of Korea set the tenor and structure for a $1 billion equivalent offering of dollar-denominated and euro-denominated global notes (A3/A).

The issuance will be comprised of five-year dollar-denominated fixed-rate notes and seven-year euro-denominated floating-rate notes.

Barclays Capital, Deutsche Bank, Morgan Stanley and Citigroup are joint bookrunners for the offering of Securities and Exchange Commission-registered notes.

Pricing is expected to take place early Tuesday.

And AES El Salvador is expected to price its $200 million to $290 million offering of 10-year notes on Tuesday. Last week, price guidance was set in the area of 225 basis points more than Treasuries.

Bullish EM

In trading, an inverted Treasury yield curve helped emerging market spreads tighten to another record low.

The 30-year Treasury bond saw heavy demand ahead of Thursday's auction. The government will sell $14 billion of the 30-year bonds, its first sale of the issue since the bond was sent into retirement in early 2001.

On Monday, the long bond saw heavy trading while other parts of curve fell on supply issues, said sources. This week alone will see the Treasury Department issue $48 billion of new debt.

"In the when-issued market, the 30-year is trading a lot stronger than where it actually is on the cash market," remarked Enrique Alvarez, Latin America debt strategist for IDEAglobal.

He added that the expected demand for the 30-year bond boosted the attractiveness of high yield and emerging market bonds as the yield on the two-year note ended higher than the 30-year bond.

Strong demand for the 30-year could translate into lower long-term interest rates in the United States, a good driver for the emerging markets asset class.

If overseas bidders make their presence known at this week's auction of U.S. government bonds, this of course will bode well for emerging markets, remarked Alvarez, adding that it signifies demand for yield on a global basis. Another plus will be if domestic currencies in Latin America continue to gain strength.

Argentina, oil strong

Argentina and oil producers were among the winner's in Monday's session, said a trader.

During the session, the Argentina discount bond due 2033 added 0.90 to 94.65, 94.90 offered.

The Ecuador bond due 2030 gained 0.50 to 99.35 bid, 99.75 offered. The Venezuela bond due 2027 moved up 1.05 to 126.75 bid, 126.95 offered.

Elsewhere the Brazil bond due 2040 added 0.60 to 130 bid, 130.15 offered.

EM to trade in tight ranges

The spread on the JP Morgan EMBI+ Index tightened by three basis points to 211 basis points more than Treasuries on Monday

Spreads are extremely tight, but exactly where that market correction will come from is anyone's guess, said the trader.

"Peru could be the trigger if it goes left," he said, "but for now, the market should be range-bound."

Recent polls are showing that leftist Ollanta Humala of the Peruvian Nationalist Party (PNP) is losing popularity. Allegations of human rights violations have surfaced against him. Nonetheless, the election is too close to call at this moment.

Alvarez agreed that a leftist victory in Peru could dampen investor's appetite for risk.

The other external shock could from a unexpected spike in oil prices, perhaps stemming from the standoff over Iran's nuclear ambitions, he added.

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