Emerging market debt stronger with U.S. Treasuries; Colombia up on pension reform, Ecuador down

By Reshmi Basu and Paul A. Harris

New York, June 22 - Emerging market debt moved higher as U.S. Treasuries emerged as the main driver, while paper from oil-producing countries edged upwards as oil prices hovered above $58 per barrel.

In the primary market, Wan Hai Lines (Singapore) Pte. Ltd. priced $325 million of 5½% 10-year notes (Baa2/BBB) at 99.688 on Tuesday, for a 143 basis points spread to U.S. Treasuries.

Citigroup and UBS Investment Bank ran the books.

Also in the primary, special-purpose vehicle Voto-Votorantim Overseas Trading Operations IV Ltd. sold an upsized offering of $400 million of 15-year bonds (/BBB-/BBB) at par to yield 7¾%, according to a market source.

Votorantim Participacoes (VPAR) will guarantee up to 100% of the principal amount. Its subsidiaries Votorantim Celulose e Papel and Cimento Rio Branco will each guarantee 50% of the amount.

Credit Suisse First Boston ran the Rule 144A/Regulation S notes offering.

EM sees firmer tone

Emerging market debt gained some momentum as it closely tracked the U.S. Treasuries market.

"Trading was slightly higher in Latin American bonds, but maybe underperforming Treasuries a touch," said a trader.

The underperformance of emerging markets has to with consolidation over recent sessions, added the trader.

"It's had a pretty good run over the last couple of weeks. It has to pause at times," he said.

Meanwhile, Treasuries had their best session in two weeks as the yield on the 10-year again flirted with the psychological 4% barrier.

The yield stood at 4.05% by the end of trading Tuesday, down from Monday's close of 4.10%.

That gain helped push Brazil's paper higher as the alleged corruption charges against president Luiz Inacio Lula da Silva's government have now been put to rest, at least for the short-term, said sources.

During trading, the Brazil C bond moved up 0.187 to 102.062 while the bond due 2040 added 0.60 to 119.45 bid.

"The overall tone just remains good," said Enrique Alvarez, Latin America debt strategist for IDEAglobal.

"The local scenario seems to be cooperating a little bit more. Everything has quieted down in Brazil, so that is reverting the focus back into the U.S. market," he said.

"And at this point in time, it's Treasuries that seems to be taking the lead due to the fact that crude [oil] sort of wilted a little."

Oil prices fell slightly in trading Tuesday, after reaching another record high. Crude oil for July delivery slipped 47 cents to close at $58.90 a barrel.

While high oil prices have been a boon to such oil producers as Venezuela, there is a long-term concern that the high prices will cause inflationary pressure, said Alvarez.

"There is a big question mark lingering over the market because in the past... it has prompted two mind frames," he remarked. One camp is that the market may be overrun by inflation concerns. Recent movements in gold have been indicating such fears, he noted.

"The other camp suggests that consumer sentiment could tank even worse than it is and cause growth to slow down," he added.

Alvarez noted that investors' mindsets appear to be slanted towards a scenario of inflationary pressure, but for no tangible reason.

"That seems to be what the market is telling us by the action you are seeing in commodity markets," he said.

"Whether there will be a spillover effect in Latin America, it just depends. There will be an inflection point in oil where things sort of unravel," he replied.

The question is whether the point is $60 per barrel or beyond, "but that should put pressure on equity markets and we should see some flow-over effect in Latam."

"I think it's a question of time," Alvarez added.

During trading Tuesday, the Venezuela bond due 2014 added ¾ point to 103½ bid while the bond due 2027 gained 0.60 to 104.40 bid.

Colombia up, Ecuador down

In other developments Tuesday, Colombia was better bid, said a second trader.

"They reached an agreement on pension reform between the senate and the house. That is welcome news. The market had anticipated hearing about this agreement on Monday. But now prices are starting to move again," he said.

Colombia's Congress approved revisions late Monday to the country's pension law, which will result in the reduction of government payments by 46.7 trillion pesos over the next 50 years.

Also, Colombian industrial production gained 10.96% in April, compared with a 3.4% increase in the same month last year,

During trading, the Colombia bond due 2012 moved up 3/8 of a point to 116 bid.

Meanwhile, Ecuador bonds continued to be hit by a recent downgrade from Standard & Poor's. The ratings agency Monday lowered the country's long-term sovereign credit rating to CCC+ from B-. The action reflects the agency's concerns about the ability of the government to cover its financing needs over the coming year, S&P said in a statement.

"I think it took the market by surprise," said the second trader.

"But then again Ecuador is a little bit of a special situation."

The first trader disagreed, saying the market already had concerns.

"I don't think it was overall surprised," he said,

During the session, the Ecuador bond due 2030 lost a point to 84¼ bid.

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