Emerging market debt down slightly on profit taking; Banco Votorantim to issue $200 million notes

By Reshmi Basu and Paul A. Harris

New York, Sept. 22 - Emerging market debt nudged lower Thursday as investors cashed in on the day after the market saw a strong rally.

"I'm not sure what it was but high-grade [and high-yield] started off the day really weak this morning," said a sellside source.

The source noted that crossover credit derivative indexes and CDX indexes opened the session notably wider.

"We also of course have seen a lot of volatility in oil prices and as a result, movements in the dollar. That had people on edge and we had some profit taking."

The selling came a day after emerging market debt saw a strong performance on the back of a U.S. Treasuries rally. Treasuries on Wednesday decided to ignore the Federal Open Market Committee's statement, which showed that the Fed would continue to hike rates.

The sellside source described the Treasury movement as somewhat illogical in that the market is being dismissive of the Fed. The Fed statement noted that its primary concern post-Katrina is inflation. But the market chose to ignore it. Instead the market decided to rally long-end Treasury bonds by 1%, remarked the sellside source.

Coming off a strong session, emerging market investors chose Thursday to cash in, but the source noted that the action was "not a big deal" and that most major bonds were only two basis points wider.

"Traders and guys from sales are starting to feel a little uncomfortable with the levels they had this morning," noted a second sellside source.

"They are getting a little nervous because these are not levels that they had seen before."

"There was some widening in the high-yield sector. Apparently EM was not touched by that volatility. And they thought it was a little strange," he said, adding that the market saw better sellers.

During the session, the JP Morgan EMBI Global Diversified index was two basis points wider to close at 254 basis points over Treasuries. The Brazil bond due 2040 lost a quarter of a point to 121 bid. The Venezuela bond due 2027 lost 0.55 to 116.05 bid.

Excluding Thursday's session, emerging market debt has been trading at record tights, which does come as a surprise to almost everyone, noted the first sellside source.

"The technicals in the market remain good," said the source.

"People are pretty comfortable with the fundamentals in emerging markets. The kinds of things that are worrying people are generally things that are external to our market."

The first sellside source also noted that these bursts of selling tend to be short-lived.

Meanwhile the second sellside source commented that the "search for yield" continues to drive the market.

"Apparently, anyone can get away with a new bond that yields more than 7%."

Additionally, he said, whether or not issuers tap the market will depend on how much volatility the market sees in the coming sessions.

Banco Votorantim to start roadshow

In the primary market, Banco Votorantim will begin a roadshow Tuesday in London for a $200 million offering of notes maturing in 2015 (expected ratings Ba3/BB-).

The roadshow moves to the United States on Wednesday and Thursday. Pricing is expected afterwards.

Deutsche Bank Securities has the books for the Rule 144A/Regulation S offering.

And Banco Bradesco SA revised price guidance for a reais-denominated offering of bonds due January 2010 to 14.8% to 15%, according to a market source.

Pactual Banking Ltd. is running the Rule 144A/Regulation S transaction for the issuer's Cayman Island branch.

These two issues follow Brazil's first local currency-dominated issue in the international capital market. On Monday, the country sold R$3.4 billion ($1.479 billion equivalent) of global bonds due Jan. 2016 at 98.636 to yield 12¾%.

On Thursday morning, the new bond traded at 963/4, almost two points down, according to a market source.

The source added local rates have backed up 40 basis points since Jan. 10. As anticipated, the bond was priced rich in the long end. However, the dollar price in the bond is only a touch lower due to currency appreciation.

And Telefonica del Peru SAA starts a roadshow Friday in London for a $200 million equivalent offering of Peruvian nuevos soles-denominated senior unsecured notes maturing in 2016 (//BB).

The roadshow moves to New York on Monday, to Boston on Tuesday and wraps up Wednesday in Los Angeles.

Peru has a developed local fixed-rate curve, which extends to 2020, according to a source. The 10-year bonds are trading at 7.00% mid-market yield. The source added that Peruvian soles are currently at 3.3025, averaging 3.26 in the last six months.

The source added that any positive movement in the currency is good for investors.

Citigroup has the books for the Rule 144A/Regulation S offering. ABN Amro is the co-manager.

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