Emerging market debt softer on U.S. Treasuries; funds see inflows of $77 million

By Reshmi Basu and Paul A. Harris

New York, April 6 - Emerging market debt was weaker Thursday ahead of the release of non-farm payroll data in the United States scheduled for Friday morning.

In other news, emerging market dedicated funds posted modest inflows of $77 million for the week ending April 5, according to EmergingPortfolio.com Fund Research.

The numbers are slightly higher than last week's inflows of $25 million, but bland nonetheless.

In the primary market, Korea Zinc Co., Ltd. sold a $100 million offering of three-year floating-rate notes at par to yield six-month Libor plus 68 basis points.

Proceeds from the sale will be used for general corporate purposes.

ABN Amro is the bookrunner for the transaction.

And ALB Finance BV, a Netherlands-based special purpose vehicle of JSC Alliance Bank of Kazakhstan, is talking its $100 million to $150 million offering of upper tier I perpetual notes (B1) at 9 3/8% to 9 5/8%.

The perpetual notes are non-callable for 10 years and feature a coupon step-up provision in the event that the notes are not called.

Alliance Bank is also currently in the market with an offering of senior notes (Ba2//BB-) that are expected to come with a five-year to seven-year maturity. The size of the senior notes tranche remains to be determined, according to a source, who added that they are expected to price some time after the perpetual notes transaction is completed.

Credit Suisse and UBS are leading both of the Regulation S tranches.

The roadshow is expected to move to Switzerland on Friday and to wrap up in London on Monday.

EM weaker

Emerging market debt saw higher trading volumes during the morning session, but then volumes fizzled off towards the afternoon, according to market sources.

Most sovereigns bonds traded down on a dollar basis in response to volatility in U.S. Treasuries.

Treasury yields spiked higher Thursday after weekly jobless claims posted a drop and following cautionary comments by Chicago Federal Reserve president Michael Moskow regarding inflation.

Furthermore, Friday's job numbers have created a sense of anxiety this week, resulting in a bearish Treasury market. And those figures are expected to set the tone for Friday's session.

If the numbers are strong, then the Fed is expected to almost certainly raise rates to curb inflation, which will hurt emerging markets, noted sources.

If the number of jobs created is less than 150,000, then Treasuries will turn bullish, estimated a market source. If the numbers fall between 190,000 to 225,000, then Treasuries' reaction will be neutral. And if the numbers are above 225,000, then the bears return.

During Thursday's session, the yield on the 10-year note climbed to 4.89% from Wednesday's close of 4.85%.

Meanwhile, as a result of the Treasury spike, emerging markets saw intra-day volatility, noted a trader, adding that bonds were down a half a point or so before crawling back.

"I think the market has been a little bit choppy in general. The bond markets globally have been pushing higher yields," he noted.

"Brazil bonds were down a little bit this morning but are they are now creeping back towards yesterday's [Wednesday's] late levels like 128 [bid]," noted a trader.

"On a spread basis considering, U.S. bonds are down, it's [Brazil] actually doing okay."

By session's end, the Brazilian bond due 2040 had slipped 0.25 to 128.20 bid, 128.30 offered while its spread to Treasuries had tightened by four basis points versus Treasuries.

The tightening is a clear indication of Street positions, according to a source.

Additionally, the trader noted that trading volumes were "okay" in the morning, but by the afternoon had thinned out. And the number of players has also thinned out, while dealers and local accounts being the most active participants.

Colombia down, among others

Other losers included Argentina, Ecuador, Russia and Venezuela. The Argentinean par bond due 2033 fell 0.25 to 98.10 bid, 98.50 offered. The Ecuadorian bond due 2030 shed 0.80 to 99.15 bid, 100 offered. The Russian bond due 2030 eased 0.69 to 108.938 bid, 109.063 offered. And the Venezuelan bond due 2027 lost 1.05 to 124.95 bid, 125.30 offered.

Colombia was another loser on the day. During the session, the Colombian bond due 2033 shed 1.50 to 138 bid, 139 offered.

"The Colombian local markets have been seeing a volatile session today [Thursday] on the back of the uncertain international environment," said Alberto Bernal, fixed income analyst at Bear Stearns, in a research note.

"According to our conversations with local players, the continued upswing in UST rates is to blame for the stressful market," he added.

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