Emerging market debt ends May on a high note; Mexico outperforms, Turkey rallies

By Reshmi Basu

New York, May 31 - Emerging market debt ended Tuesday's session stronger, while Mexico outperformed on potential reconfiguration of high-grade indexes due to the fallout from General Motors Corp.'s credit rating troubles.

Meanwhile in the primary market, Banco Itau Europa SA, via its Madeira branch, plans to issue €200 million in five-year floating-rate notes (Baa1//BBB+) under the company's euro medium-term note program.

Hypovereinsbank, ING and Banco Itau Europa are joint lead managers for the offering.

And Mexico's Corporacion Interamericana de Entretenimiento SA de CV plans to issue $200 million of 10-year bonds (Ba2/B+ (expected)) next Monday.

The senior unsecured notes will be non-callable for five-years.

The roadshow started Tuesday and runs through Friday. Pricing is expected on Monday.

Citigroup is running the Rule 144A/Regulation S offering.

In Europe, the City of Bucharest plans to start a roadshow for a benchmark size offering of euro-denominated notes (NR/BB+) in Athens on Friday, according to a market source.

The roadshow will then move to Vienna and Paris on Monday, followed by Frankfurt and Munich on Tuesday, the Netherlands on Wednesday, and London on Thursday.

ABN Amro and JP Morgan are running the Regulation S offering.

Mexico up in trading

Emerging market debt had a solid showing Tuesday as U.S. Treasuries rallied on higher demand for U.S. assets. France's rejection of the E.U. constitution on Sunday helped spur higher prices in Treasuries and a gain in the dollar.

Additionally, economic data from the United States helped Treasuries. The Chicago Purchasing Manager's index fell to 54.1% in May from 65.6% in April.

The yield on the 10-year note stood at 3.98% in late trading.

"You saw a very slight compression on spreads, but with a good upside in prices," said Enrique Alvarez, Latin America debt strategist for think tank IDEAglobal.

He added that Mexico outperformed on the back of rebalancing of investment-grade indexes. During the session, the Mexico bond due 2009 added 0.35 to 119.65 bid.

Indexes for Lehman Brothers and Merrill Lynch will drop General Motors, given its downgrade to junk. The re-weighting will mean that portfolios tied to these indexes will need to increase their exposure to Mexico as all the remaining names in the index will make up a bigger proportion now one of the biggest issuers has been dropped.

Brazil gains despite poor news

Even Brazil gained despite reports of slower growth and lower approval ratings for the Brazilian government.

Brazil's growth came in less than expected for the first quarter at 2.9%. And president Luiz Inacio Lula da Silva's approval rating slipped to 39.8% in May from 41.9% in April.

During trading, the Brazil C-bond gained 0.062 to 101 7/8 bid while the bond due 2040 added 0.45 to 118.65 bid.

Also, high oil prices boosted Venezuelan debt. The bond due 2027 added 1½ points to 100½ bid.

Meanwhile Ecuador's paper fell in response to comments made by economy finance minister Rafael Correa that the nation is ending the surveillance program with the International Monetary Fund.

The Ecuador bond due 2030 slipped 0.30 to 78.20 bid.

Looking ahead, Treasuries will guide Latin American paper, Alvarez said, adding that overall Latin America debt would move higher if yields on Treasuries broke lower than the current 3.90% plus area.

Turkey up

The negative vote on the E.U. front also helped ignite a short-covering rally for Turkey's bonds. The Turkey bond due 2030 added 0.62 to 138.62 while the bond due 2010 added 1 3/8 points to 123 1/8 bid.

"So far, it's mostly been a sell the rumor, buy the fact experience - there were so many shorts out there that there wasn't much selling left to go," said an emerging market analyst.

"Despite Turkey's technical recovery, the fundamental fact remains that the wide margin in the France vote signals trouble ahead for Turkey's E.U. candidacy.

"E.U. accession talks will probably get underway later this year, but they are likely to be unproductive for the first few years while the major European governments get their bearings, especially after the upcoming German elections," he added.

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