Emerging market debt flat in the thin trading; UTI Bank to start roadshow

By Reshmi Basu and Paul A. Harris

New York, July 31 - Emerging market debt saw a quiet session Monday in the absence of U.S. economic data.

In the primary market, India's UTI Bank Ltd. plans to start a roadshow for its debut offering of dollar-denominated bonds on Tuesday in Hong Kong.

The issuer has mandated Barclays Capital, Citigroup and Deutsche Bank to lead the transaction.

The transaction will be the first subordinated debt deal from India.

For the most part, spreads were unchanged during an illiquid trading day Monday, following Friday's rally. Nonetheless, the tone was described as positive.

"The market is well-supported," noted a trader. "But there's not much upside out there," he added.

In July, emerging markets have churned higher on expectations that the Federal Reserve's current monetary tightening campaign is coming to an end. In the last month or so, spreads for the asset class have tightened 50 to 55 basis points versus U.S. Treasuries.

But the euphoria from that expected end to rate increases has since been squeezed out, remarked the trader.

"There are really no drivers out there that can move the market higher," observed the trader.

EM flat

Meanwhile the morning session saw spreads unchanged for Latin America, noted a market source. As the session progressed, trading volumes dried up.

Overall, the market was flat. For the day, the bellwether Brazilian bond due 2040 lost 0.30 to 128.30 bid, 128.40 offered, the Argentinean discount bond due 2033 shed 0.30 to 93.75 bid, 94.10 offered and the Venezuelan bond due 2027 fell 0.40 to 123.50 bid, 123.70 offered.

Looking ahead, the market will be U.S. data sensitive ahead of the Federal Open Market Committee meeting on Aug. 8.

"Unless there's some [U.S. economic] data that supports the case for more hikes, the market should be okay," remarked the trader.

"Trading [volume] is definitely coming down ahead of Friday," he said, referring to the release of non-farm payroll numbers in the United States.

Traditionally, August tends to see the lowest trading volumes of the year, noted a market source.

Ecuador to call 2012 bond

Ecuador plans to call its bond due 2012, announced the country's minister of finance Armando Rodas.

The timing of the announcement was surprising for two reasons, wrote Alberto Bernal, fixed income analyst for Bear Stearns in a note.

"First, the [president Alfredo] Palacio administration had reinstated the populist talk of paying the "social debt first" after the firing of former finance minister [Diego] Borja a couple of weeks ago," he said, adding that Borja was responsible for calling part of the 2012s in April.

"Second, also on the negative side, our local consultants have told us repeatedly that the attorney general has been investigating possible wrong-doing related to the issuance of the new Ecuador 2015s (the argument is that the lead managers disbursed less money to Ecuador than they were supposed to).

"That investigation implicates the current minister of finance, Mr. Armando Rodas, as he was the Public Credit Head at the time the issuance was followed," Bernal noted.

Furthermore, he added that Palacio's stance on the buyback is murky.

"Despite the unequivocal "win-win" that retiring these bonds means for the Republic from a financial point of view, the political picture is not as clear.

"The headline of the Palacio administration repaying "foreigners" in the middle of an election cycle may prove too costly for future political intentions," cautions Bernal.

As a result of the market being caught off-guard by the announcement, the Ecuadorian bond due 2012 shed 1.75 to 101.75 bid, 103.75 offered during the session.

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