Emerging market debt choppy; two corporates price deal

By Reshmi Basu and Paul A. Harris

New York, Sept. 29 - Emerging market debt was choppy Friday amid lower U.S. equities while Brazil saw stable prices ahead of the weekend's presidential election.

Meanwhile two corporate deals priced.

Moscow Narodny Bank priced $500 million of three-year floating-rate notes (Baa3//BBB-) at 99.862 to bear a coupon of three-month Libor plus 80 basis points via UBS and ING.

And Petrobras International Finance Co. sold $500 million of 10-year notes (Baa2//BB+) at 99.557 to yield 6.185%.

The company is a subsidiary of Petroleo Brasileiro, a state-run oil company.

Morgan Stanley and UBS Investment Bank ran the Rule 144A/Regulation S transaction.

Choppy trading

Emerging market debt was uneven Friday as U.S. stocks snapped a four-day winning streak.

Meanwhile Sunday's upcoming election in Brazil did little to dampen sentiment.

Even news that president Luiz Inacio Lula da Silva skipped out on a television debate with other presidential hopefuls did not resonate with investors, according to Enrique Alvarez, Latin America debt strategist for think tank IDEAglobal.

Brazil's stock market and currency were mostly unchanged Friday, as president Luiz Inacio Lula da Silva is expected to win a second term, despite being dogged by allegations of misconduct in a graft probe.

Nonetheless a trader noted that trading volumes were light as few wanted to make moves in case there were any election surprises, which is unlikely.

"But no one wants to be caught off guard," he said.

During the session, the bellwether Brazilian bond due 2040 slipped 0.05 to 130.30 bid, 130.35 offered.

Ecuador up on short covering

Meanwhile Ecuador emerged as the winner Friday, doing something which it has not done in a very long time: the country outperformed the market as its bonds bounced back on short covering.

But Alvarez noted that not too much can be read from Friday's price action.

Over recent sessions election jitters in Ecuador have put the market on edge amid the sudden rise in popularity of presidential hopeful Rafael Correa, who has unnerved investors with market unfriendly declarations on debt restructuring.

But in trading Friday the Ecuadorian bond due 2015 added 0.50 to 99.70 bid, 100.50 offered while the bond due 2030 moved up 0.40 to 92.70 bid, 92.90 offered.

On Thursday, the 2030 bond had eased 0.80 to 91.80 bid, 92.50 offered.

EM trading with equities

Overall emerging market debt has had a strong correlation with the equity market in recent days.

The equities market has been bullish, despite concerns that weakness in the U.S. housing market will pressure the United States and global economy over the next few months.

The market has surged on sentiment that the downside risks to the economy are limited and that the Greenspan put is still intact at the Federal Reserve, according to a market source.

For the second straight day Friday, the Dow Jones Industrial Average index briefly pierced the record close, which was recorded in January 2000. Additionally, the index scored its largest third-quarter advance since 1995.

But there is a vulnerable side to the recent equity rally. The shares are not widely owned. Instead many corporates have been buying back their shares.

The run-up in equities has been a boon to sentiment in emerging markets. Nonetheless, the asset class has been trading in tight ranges. The JP Morgan EMBI Global index is at the upper part of this year's range, according to the source. The index is trading at 207 basis points versus a range of 175 to 225 basis points, which makes the carry trade attractive at around 200 basis points.

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