Emerging market debt held down by Treasury weakness; questions on Poland

By Reshmi Basu and Paul A. Harris

New York, March 29 - Emerging market debt slightly dipped Monday in reaction to the weakness in U.S. Treasuries. The release of vital U.S. economic indicators this week is also helped keep trading light as well as the start of the Inter-American Development Bank meeting.

The JP Morgan EMBI global index had slipped 0.20% by late afternoon. Its spread to Treasuries tightened by two basis points.

No identifiable emerging market news is causing a drag on emerging market debt.

"There's a little bit of weakness in the Treasuries market" which is impacting debt, said a fund manager." "It's not an emerging market specific thing. It's something that I can't identify," he added.

Also, adding to the thin trading is the release of important U.S. economic indictors.

On Wednesday the Census Bureau releases factory orders. And on Friday the Labor Department releases U.S. payroll information.

"These are big indicators for the US. Treasury market," said the fund manager.

Poland PM change raises doubts

Meanwhile, the proposal by Poland's president Alexander Kwaznieski to replace unpopular prime minister Leszek Miller with leftist Marek Belka is inciting political concerns.

Miller will step down on May 2, the day after Poland joins the European Union.

"Poland is struggling to control its fiscal deficit and needs a radical change in budget policy," said an emerging market analyst.

"S&P has Poland's BBB+ on outlook negative for precisely this reason and Moody's, which already has its neck stuck out with its A2 rating, might not be far behind. I don't see how appointing Belka helps re-establish confidence in the fiscal profile."

On March 11, Poland priced a €700 million add-on to its 4½% notes due February 2014 at the equivalent spread of mid-swaps plus 48 basis points.

In trading Monday, the bond due 2014 closed at 113 bid, 105.750 offered, down 0.38. But it nonetheless tightened six basis points.

The Poland EMBI component was nearly flat with a 0.01% gain. Its spread to Treasuries tightened six basis points.

Dominican Republic misses coupon

Meanwhile international financial institutions are likely to stay out of negotiations with investors, according to a fund manager.

This weekend, the Dominican Republic missed a $24 million interest payment due on its bonds.

The government will use a 30-day grace period to hammer out a debt management strategy with the Paris Club of country creditors, according to news reports.

"They will stay clear," the fund manager said of international institutions.

"They are going to let the Dominican Republic negotiate with Paris Club before they do anything."

The Dominican Republic meeting is set for April 12.

Also in Latin America, Brazil continues to suffer from the country's political uproar.

Brazil's C bond finished at 96.5 bid, 96.625 offered, down a little from Friday's 96.625 bid.

In trading Monday, Brazil's component of JP Morgan's EMBI index fell by 0.61%. Its spread to Treasuries widened 2 basis points.

"Things are okay in terms of the economy," said the fund manager.

"But it's really the political noise that is bringing the volatility to the market."

On Thursday, Brazil received a respite from a week of bashing, but was knocked down again on Friday.

Hutchison Whampoa firm

News that Hong Kong Telecom Hutchison Whampoa may dispute a government decision to take back and re-auction radio frequency used for high-speed cellular access did little to shake trading in the name.

Trading was firmer overnight, "mainly fast money driven" according to a trader.

Its 6¼% bond due 2014 closed at 197 basis points bid, 192 bps offered. That was 5 basis points better than Thursday's close of 202 bps bid, 198 bps offered. Its 7.45% bond due 2033 closed at 237 bid, 233 offered, 7 bps better than Thursday's 244 bps bid, 239 bps offered. And its 5.45% bond due 2014 was bid at 211 bid, 206 offered, 4 bps better than Thursday's 215 bps bid, 211 bps offered.

Kazkommertsbank talk; Malaysia adds to pipeline

Price talk of 475 to 500 basis points surfaced on Kazkommertsbank's planned $100 million of 10-year notes.

Citigroup and ING are running the Rule 144A/Regulation S deal for the Kazakhstan bank.

Meanwhile, the issuance pipeline grew as Malaysia's Commerce International Merchant Bank is planning issuing 10-year $100 million notes.

Adding to the Russian pipeline was diamond company SeverAlmaz. The Alrosa subsidiary is expected to place an add-on to its $100 million eurobond due 2006,

ING is the bookrunner on the Regulation S deal.

Also, Russian Standard Bank is on the road through April 1 with an offering of a minimum $150 million of three to five year eurobonds via Barclays Capital and Citigroup.

The roadshow began Friday, travels through Asia and Europe and is expected to end in London on April 1.

Pricing is expected in early April.

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