Emerging market debt on pause ahead of inflation data; Public Bank sells $200 million tier I securities

By Reshmi Basu and Paul A. Harris

New York, Aug. 14 - Emerging market debt switched into neutral in light summer trading Monday, as investors awaited this week's release of inflation data.

In the primary market, Malaysia's Public Bank Bhd. sold $200 million of tier I capital securities (Ba2/BBB) on Monday via Barclays Capital.

The issue priced at par to yield 6.84%.

The securities are non-callable for 10 years. If not called, the coupon will step up by 100 basis points; the notes will mature in 30 years by means of a stock settlement.

And adding to the pipeline, Indonesia's Noble Finance BV set price talk for a $150 million offering of five-year senior secured notes (/B/B) in the area of 11½%. The issuer is a special-purpose vehicle set up by Lumpur, Malaysia-based property developer Mulia Group.

Citigroup is the bookrunner for the Rule 144A/Regulation S transaction. The deal is expected to price in the middle of this week.

EM awaits inflation numbers

Emerging market debt was a smidgeon higher in trading Monday, as investors stood on the sidelines awaiting this week's release of the U.S. consumer price index. In the last week, the market has been rattled by concerns that the Federal Reserve will resume monetary tightening at its next meeting in September.

The CPI numbers, which are set to be reported on Wednesday, are seen as somewhat influential in deciding what the Fed's next step will be.

"The Fed has put all of its chips on its theory that a slowdown will sort of withdraw the inflationary pressures that we are seeing," said Enrique Alvarez, Latin America debt strategist for think tank IDEAglobal.

If the monthly increase in the core CPI figure is higher than the expected 0.3%, then the Fed will appear to be on the wrong side of the equation, he noted.

And that means that the Fed will have to reverse course and again raise interest rates, which is a troublesome scenario for the market. However Alvarez pointed out that it is rare for the central bank to increase the fed funds target rate this late in the year and so close to mid-term elections, which makes the lead up to the Federal Open Market Committee meeting quite interesting and perhaps turbulent.

Illiquid EM session

Market sources described Monday's session as quiet, which is not unusual for an August day, since many investors are out on vacation.

Meanwhile the easing of Middle East tension played a minimal role in emerging markets, unlike U.S. Treasuries. At session's end, the yield on the 10-year note jumped three basis points to close at 5.03%.

"In Latin America, you saw a very standstill market, very summer doldrums type environment," remarked Alvarez.

Furthermore, Monday saw little price action, said a trader. During the session, the benchmark Brazilian bond due 2040 was a tad lower at 129.50 bid, 129.35 offered, down 0.05. The Argentinean discount bond due 2033 was unchanged at 96.55 bid, 97 offered. The Colombian bond due 2033 was also unchanged at 134.50 bid, 135.50 offered.

Elsewhere, the Russian bond due 2030 gave up 0.25 to 109.375 bid, 109.625 offered. The Turkish bond due 2030 lost 0.38 to 147.75 bid, 148.25 offered.

Furthermore, the money coming in from August's amortization and coupon payments has already been put to work as investors front-loaded ahead of the windfall, observed Alvarez.

Meanwhile dedicated money is in wait-and-see mode, awaiting any new developments on the Latin American liability management front for 2007. And hedge funds will sit on the sidelines until there is an uptick in volatility, he noted.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.