Emerging market debt up on CPI numbers, Ecuador down further on political jitters

By Reshmi Basu and Paul A. Harris

New York, Sept. 15 - Emerging market debt saw support Friday on the back of a tame reading of consumer price index data in the United States. That served to take some of the edge off investors' worries that the Federal Reserve would raise interest rates next week.

The Labor Department reported a 0.2% jump in both overall U.S. consumer prices and core consumer prices, coming in line with expectations. On that news, U.S. stocks surged to near their highs for the year.

As a result of stronger equities, Latin America was up on the day. During the session, the bellwether Brazilian bond due 2040 rose 0.25 to 130.20 bid, 130.25 offered. The Argentinean bond discount bond due 2033 gained 0.50 to 97 bid, 97.50 offered. And the Venezuelan bond due 2027 edged higher by 0.25 to 121.60 bid, 121.90 offered.

Elsewhere, Ecuador once again emerged as the session's underperformer on election jitters. In trading, the Ecuadorian bond due 2030 gave up a point to finish the week at 95.50 bid, 95.75 offered.

Ecuador slipped steadily during the week as Rafael Correa, former finance minister and friend of Venezuelan president Hugo Chavez, turned up the rhetoric in his populist campaign - and advanced in recent polls, although he remains behind former vice president Leon Roldos.

Inflation still a risk

Nonetheless, the overall asset class is still trading without conviction, according to market sources.

Emerging markets has been described as directionless in the last week, as investors attempt to gage how much more upside is left for the asset class. The debt market has traded in tight ranges, with yields at the same level as it was two weeks ago.

The CPI numbers, while supportive, failed to trigger a rally out of that range, according to a market source.

In trading Friday, spreads tightened by two basis points to 192 basis points versus Treasuries, still a relatively expensive level.

Friday's CPI numbers, at face value, served as a pretext for buyers to enter the market. But the inflation picture is still very much a real risk, according to an emerging market analyst.

"I think technicals in the market were set for a modest positive correction, and this morning's [Friday's] CPI numbers are simply an excuse for that correction," he said.

"The amount of issuance that's come to market has not been quite as much as had been expected at the beginning of the month, and the duration extension from the Colombia, Philippines, and Turkey exchanges have been more manageable than had been feared."

The analyst noted that CPI numbers do not provide a lot of direction to the market, because U.S. core inflation is still up 2.8% on a year over year basis, "a high number no matter how you slice it."

The overall technical story signals that the market will continue to trade in tight ranges, noted a market source.

The pause in the rally over the last two weeks is indicative of a market breather, but in the near term, it does suggest that there could be a profit-taking back up in bonds.

Higher yields will most likely not be seen as they would bring in buying from Asia and oil exporters.

Furthermore, the analyst observed that new issuance would cap any significant upside.

"EM corporates have kept things in the pipeline a little longer than they might have, but a big drop in EM spreads would probably hurry those pipeline deals into the market," he noted.

EM issuance

In other news, Agile Property Holdings Ltd. priced an upsized $400 million issue of seven-year senior notes (Ba3/BB) at par on Friday to yield 9%.

The deal, increased from $350 million, came at the tight end of the 9% to 9 1/8% price talk, which had been inwardly revised from 9¼% area.

Morgan Stanley and HSBC were joint bookrunners for the Rule 144A/Regulation S notes, which came with four years of call protection.

The issuer is a Hong Kong-based developer and manager of property in the People's Republic of China and the British Virgin Islands.

Also pricing, Alliance Bank JSC Kazakhstan sold $350 million of seven-year eurobonds (Ba2//BB-) at 98.743 to yield 9 ½%.

The deal came in line with price guidance, which was set at the 9½% area.

Credit Suisse and JP Morgan were joint bookrunners for the Rule 144A/Regulation S transaction.

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