Emerging market debt tightens in trading; investors in comfort zone

By Reshmi Basu and Paul A. Harris

New York, April 13 - Emerging market trading continued to trudge along Tuesday as investors appeared be content with their current market positions.

"EM is really outperforming Treasuries substantially right now," said a buy-side source.

"Nobody wants to get real aggressive. At the same time, people aren't looking to get out because they are pretty comfortable with their stories. There's nothing to do," he added.

The JP Morgan EMBI Index slipped 0.40% but - indicating the outperformance against U.S. governments - its spread to Treasuries tightened by five basis points.

"But you can't really argue that it's a super cheap market," said the buy-side source. "Everything is down in price today. Everything is also tight around Treasuries."

One of the catalysts behind the unenthusiastic trading volumes of late is that the next market move will be a downward shift, according to Steve Hope, managing partner of Outrider Management.

"The markets are slow because nobody wants to buy. But there's no real impetus to sell," Hope said.

"We're bouncing along at the top in a trading range. Nobody wants to be fully invested, so there's not much out there to push prices higher. But people keep getting money in," added Hope

"At the margin, prices just continue to edge higher and come tighter."

Also, the buy-side source added that there were no market mechanisms to shake things up.

"People are over-weight. If anything, they bit off more than what they wanted chew back in January," said the buy-side source.

"You are not worried about growth. You are worried about whether the Fed is going to raise rates or not, which is pretty good place to be."

Issuance pipeline still on break

Meanwhile, some investors are a little puzzled as to why the pipeline is so quiet amid an attractive funding environment.

"You would think that everybody would be rushing to market bringing new deals, but then once the deals do come, there's been surprisingly little appetite or little ability for the market to carry them," Hope said.

"To me, the missing piece of the puzzle is why aren't a bunch of issuances rushing in to be sucked up by these guys who are getting inflows and need to put money to work."

"I think the answer is that people aren't actually putting money to work on new deals. And it's surprising. A lot of deals have come, had difficulty and been pulled."

"I don't know what to make of that and that's really curious to me," noted Hope.

Looking ahead, the pipeline should display signs of life at the end of April or start of May as "a lot of people are on deck" with new deals, according to the buy-side source.

"Brazil is going to do a deal sooner or later. I hear Peru is getting ready."

The source also added that Russian corporates would come to market with deals.

Furthermore, one driver that could jumpstart activity is the Brazilian coupon payments coming this month.

"Although you would have expected investing this week on the basis of those, it's really not having an effect," said the buy-side source.

"But once people actually get the cash then they might do something with it."

In other news, the Monetary Policy Committee of Brazil's central bank met Tuesday and continues Wednesday. Despite inflation concerns, the central bank is expected to cut the benchmark Selic rate to 16%, which would be the second 25 basis points reduction this year. Growing inflation concerns have trimmed investor expectations about the size of the cut.

"People are expecting them to cut, but inflation numbers have not been as good as people had hoped," said the buy-side source.

"People are expecting a 25 basis point cut. A week ago, people were looking for 50.

"If they cut more than they expected that would probably get some trading going on. If they don't cut, that would be a negative for the market but not a catastrophe for the market," said the buy-side source.

Korea East-West talk

Power-utility Korea East-West Power Corp has set price guidance for its $200 to $300 million seven-year notes (A3/A-) at 75 basis points over U.S. interest rate swap.

"Too rich for my blood," said the buy-side source. "Too tight for me."

The book is subscribed at $300 million and the deal is expected to price this week.

Credit Suisse First Boston, Barclays Capital and Samsung Securities are running the Rule 144A/Regulation S deal.

Several small corporate deals came out of Brazil Tuesday.

Rio de Janeiro-based cement holding company CP Cimento e Participacoes has set price guidance for its $30 million notes due 2006 at a yield of 7 1/8% to 7 3/8%.

BES Investimento is running the Regulation S only deal.

Also, Banco Real set price guidance for its $50 million three-year add-on at a yield of 4¼%.

Banco Itau is running the Regulation S deal for the Sao Paulo-based bank

And Brazil's largest interstate bus company Viacao Itapemirim SA is adding an additional $15.5 million to its 12% notes due 2006.

Ramirez & Co. is the bookrunner for the deal.

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