Emerging market debt higher on expected Fed pause; two corporates price

By Reshmi Basu and Paul A. Harris

New York, July 28 - Emerging market debt closed out the week on a positive note Friday, buoyed by rallies across U.S. financial markets on the expectation that the Federal Reserve will pause at its next meeting.

In the primary market, two corporates tapped the capital markets. Brazil's JBS SA (Grupo Friboi) sold an upsized offering of $300 million in 10-year senior notes (B1/B+) at par to yield 10½% via ING and JP Morgan.

Out of Turkey, conglomerate Yasar Holdings AS said it sold €150 million of five-year loan participation notes (B+) to bear a coupon of 9½%.

The deal was oversubscribed, according to a market source.

Dresdner Bank AG was the bookrunner for the Regulation S transaction.

EM spreads tighten

Spreads for emerging market debt tightened again Friday, carrying over the momentum seen in previous sessions.

Sources have observed the current spread tightening is a function of short covering as well as front loading of portfolios in anticipation of a $3.4 billion windfall in coupon and amortization payments expected this August.

On Friday, the market saw higher prices following rallies in both U.S. Treasuries and stocks on the back of economic data.

The Commerce Department reported that the U.S. economy slowed down sharply in the second quarter. Gross domestic product grew at an annual rate of 2.5%, falling short of the 3% forecasted by economists. Financial markets interpreted that as more evidence that the Federal Reserve would put an end to its current tightening cycle and not raise rates at its next meeting in August.

By session's end, the Dow Jones Industrial Average index had jumped 119.27 points to close at 11,219.70 while the yield on the 10-year Treasury note fell 5 basis points to close at 4.99%.

And what was good for U.S. markets was good for emerging markets, remarked sources.

Overall, the asset class traded higher as Brazil led the way, according to a trader, who added "with Treasuries up, we kind of traded well throughout the day.

"We did a decent amount of trading today - wasn't your normal quiet Friday," he observed.

During the session, the Brazilian bond due 2040 gained 0.65 to 128.50 bid, 128.70 offered. The Colombian bond due 2027 added 1 point to 108 bid, 110 offered.

Off-the-run names also traded higher. The Chilean bond due 2012 added 0.25 to 106.501 bid, 106.838 offered while the Panamanian bond due 2016 was up one point to 95 bid, 96 offered. And the El Salvadorian bond due 2035 was up 0.50 to 101.25 bid, 101.75 offered.

Looking ahead, the market will be U.S. data sensitive, and if those numbers continue to be benign, the positive sentiment should prevail across the asset class.

"People are expecting the Fed not to hike anymore, so we'll continue to trade well until that changes.

"We should trade well until the fall comes," remarked the trader.

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