Emerging market debt tracks U.S. Treasuries; Philippines up in trading

By Reshmi Basu and Paul A. Harris

New York, Nov. 16 - Emerging market debt drifted higher on the back of a strengthening U.S. Treasuries market. In other developments, the Philippines' debt continued its rally.

The Treasuries market firmed for the second straight session in response to U.S. economic data, which showed a benign inflation reading.

Consumer prices increased 0.2% in October, much less than September's reading of 1.2%. Core CPI, which excludes food and energy, jumped 0.2%, coming in line with expectations.

That news suggested that the Federal Reserve would continue with its measured interest rate increases moving ahead into next year rather than acting any more aggressively. That helped send yields to three-week lows. The yield on the 10-year note stood at 4.49% by the end of trading, down from Wednesday's close of 4.57%.

During the session, emerging market debt moved higher as it tracked U.S. Treasuries. Moreover, trading continues to be thin.

"It feels more like anything that we've shut down," observed a buyside source, adding that trading activity has mirrored the scant volumes usually reserved for year-end.

"Thanksgiving, of course, will really suck the liquidity out, but the volatility of the last couple of days has been really sucked out of the market," he added.

Earlier this week Brazilian paper came under pressure on speculation that market-friendly finance minister Antonio Palocci would leave his post amid corruption charges.

The headline news triggered selling pressure, but now the market has since chosen to ignore it, remarked the buyside source.

"People aren't doing anything. They are just tracking Treasuries," he observed.

"Things seem much more focused on the global risk scenario than anything country specific."

During the session, the Brazilian bond due 2040 was up 0.80 to 121.65 bid, 121.80 offered.

Philippines up big time

One credit that soared Wednesday was the Philippines, according to a trader who focuses on Asian names. That trader added there has been nothing but buyers in the market.

Treasuries' performance coupled with the strength of emerging markets has helped the sovereign, said a second trader, who also focuses on Asia. He added that there has been decent investor buying in Philippines over the last week.

"But also there are probably a decent number of accounts that are still neutral or perhaps even underweight Philippines, which hurts them when Philippines performs so well," noted the trader.

The rally has forced more people into the trade, resulting in ongoing buying of the Philippines, he said.

The first trader noted: "There is a structural re-pricing underway right now with regard to Asian high-yield sovereign credit, which has always been a sort of bastard child of the EM market. It has always been cheap versus Latin America and Europe."

And now investors are coming into the market.

On Wednesday, both the Philippines and Indonesia were trading very well while the rest of the market was softer, according to sources. The Philippines' bond due 2015 added 1.38 to 108.62 bid, 109½ offered while the bond due 2025 moved up 1.63 to 120 3/8 bid, 120¾ bid. The bond due 2030 gained 1.81 to 110 3/8 bid, 110 7/8 offered.

Meanwhile the Indonesian bond due 2015 jumped a quarter of a point to 100½ bid, 101 offered.

Asian corporates postpone

In the primary market, Malaysian steel producer Megasteel Harta postponed a $450 million offering of two-part notes (B1/B+), according to market sources.

The deal is expected to be revived in January, said one source.

Credit Suisse First Boston was the bookrunner for the Rule 144A/Regulation S notes.

Earlier Sateri International Co, which is owned by the Indonesian Tanoto family, postponed its sale of $300 million in bonds.

The buyside source said that both the issuer and underwriter could not agree on the issue size. The company wanted a $300 million deal, but underwriters wanted a $200 million deal, believing that it would trade well at that size.

Credit Suisse First Boston and Merrill Lynch were the lead managers.

"The fact that these deals [Megasteel] have had to postpone until the new year indicates how hard it is to get things done - in the high-yield corporate market at least - between now and year-end," observed the second trader, adding that this indicates that risk avoidance is in play on the corporate side of emerging markets.

The buyside source noted that there is indeed a back up in the high-yield market.

"Either EM is going to become this high-grade proxy or you just expect to see more volatility with more deals trying to get done. That might introduce some volatility back into the market," he told Prospect News.

Nonetheless, the source said that he was surprised at how well the market has absorbed new issues.

"You are tracking Treasuries tick for tick. That's more amazing than if we had tightened by 20 bps."

"It's the week before Thanksgiving, not two days. It's kind of odd," he added.

Elsewhere out of Argentina, there have been rumors that the government would buy back debt from the secondary market, according to a market source. Financing would come from the cash that remained after the debt swap due to holdouts. That amount has been quoted at $212 million, said the source.

© 2015 Prospect News.
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