Emerging market debt moves higher as 10-year falls below 4%; three issuers add to the pipeline

By Reshmi Basu and Paul A. Harris

New York, Sept. 1 - Emerging market debt was yanked higher as U.S. Treasury yields briefly hit a two-month low.

Meanwhile in the primary market, issuers began to line up Thursday for what is expected to be a busy September. Brazil's steel company Gerdau SA plans to issue $250 million of perpetual notes (Ba3/BB-) in mid-September following a roadshow in Asia and Europe.

HSBC and Citigroup are lead managers for the Rule 144A/Regulation S deal.

Also going the perpetual bond route, Brazil's Banco do Estado de Sao Paulo SA plans to start a roadshow next week for a $300 million offering of non-cumulative perpetual tier 1 bonds (Ba1).

The roadshow will run from Monday, Sept. 5 through the following Monday, Sept. 12.

Merrill Lynch is the manager for the Rule 144A/Regulation S transaction.

And out of Asia, Korea Development Bank plans to issue five-year dollar-denominated bonds (A3/A/A) via HSBC, JP Morgan and Merrill Lynch.

The issue will be launched following investor meetings in New York next week.

Good time to issue

With 10-year yields at the 4% area, issuers will try to lock in low rates, said a sellside source.

"We might be seeing the last of this low rate environment, but I don't think rates can go any lower," he added.

"It's either this or higher," remarked the sellside source.

"If you look at the issuer market, many countries have already done their funding program. Some of them have a small amount, so we could see a reopening environment, in which the issuer is...more defensive.

"They [the issuer] will use the secondary environment so as not to be so pressed by the market," he added.

In these days of tight spreads, every issue that is very cheap is very attractive, said the sellside source, who added that issues that are very distressed are also attractive because of the returns.

"There's a lot of cash out there still. It's not that they want high-yielding securities. But it's like they don't have anything else to invest in," the sellside source remarked.

EM stronger on Treasuries rally

Emerging market debt continued to move higher on day three of a Treasuries rally.

Weak economic data coupled with speculation that the economic costs of Hurricane Katrina will push the Federal Reserve to take a break from its current monetary tightening campaign pushed the 10-year to briefly dip below 4%.

The Institute for Supply Management reported that national factory activity dropped to 53.6 in August from 56.6 in July, coming in below economists' estimates. Furthermore there may be even more of a retreat looking ahead as hurricane Katrina may mean less manufacturing out of the Gulf States.

During the session, the 10-year note ended the session unchanged at 4.02%.

The JP Morgan EMBI+ index rose 0.30% while spreads tightened 15 points to 410 basis points more than Treasuries.

Furthermore, high oil prices are lending support to the view that the Fed will back off from raising rates. High oil prices are also helping oil producers such as Ecuador, Russia and Venezuela grab more buyers.

"Venezuela was very well bid because of the oil story," said the sellside source. "It has a pretty good base today [Thursday]. Mexico really tightened today [Thursday] on a spread basis."

Investors are nervous about the oil shortage. And with so few players in the game, "markets tend to move fast," he added.

And next week will be an interesting litmus test as the summer break winds down.

"The main stories will be oil and Treasuries," he remarked.

"And Treasuries are going to follow oil."

He added that the investor interest in the Brazil corruption scandal has been sidelined as all eyes are focused on New Orleans and the devastation left by the hurricane.

"The [Brazil] story is still there. But being here at the trading floor and watching TV, it's all about New Orleans.

"People get distracted very easily.

"There's still concern and we might see news coming out of Brazil next week, which might have an impact, either positive or negative."

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