Emerging market debt slips in thin volumes; Mexican corporates issue talk

By Reshmi Basu and Paul A. Harris

New York, April 5 - Emerging market debt posted losses Wednesday on thin trading volumes ahead of Friday's release of non-farm payroll numbers in the United States.

In the primary market, two Mexican corporates issued price guidance. Retailer Grupo Gigante SA de CV set formal price guidance for a $250 million offering of 10-year senior unsecured bonds (/BB/BB) at 8¾%. Price guidance was widened from initial talk in the 8¼% area.

ABN Amro is running the Rule 144A/Regulation S transaction.

Mortgage and construction lender Metrofinanciera SA de CV has given initial price guidance on its $100 million offering of perpetual notes (/B-/) of the 11¼% area.

Dresdner Kleinwort Wasserstein has the books for the Rule 144A/Regulation S offering.

The notes are callable in whole but not in part from 2016 and every interest payment date after that; if the notes are not called the coupon resets to a floating rate of three-month Libor plus 1.5 times the spread over the 10-year mid-swap rate as of pricing.

Elsewhere in Brazil, petrochemical company Braskem SA said it plans to issue $200 million in perpetual bonds.

The bonds will be structured as senior unsecured debt, according to a company press release. The bonds will be callable at par for five years in whole or in part with a minimum $100 million remaining after a partial call.

Proceeds from the sale will be used for general corporate purposes, including working capital and for financing the acquisition of certain common and preferred shares of Politeno In dústria e Comércio SA.

JP Morgan is managing the sale.

Last June Braskem priced an upsized $150 million issue of perpetual bonds at par to yield 9¾%, so the $200 million would take the company's total issuance of perpetual notes to $350 million.

However, the source pointed out, Brazil-based sugar and ethanol producer Cosan Industria e Comercio SA currently has $450 million of 8¼% perpetuals (Ba2/BB) outstanding, while Brazilian steel maker Companhia Siderurgica Nacional SA (CSN) has $750 million 9½% perpetuals (B1/BB-/BB-) outstanding.

EM sees light volumes

Overall, emerging market debt was lower Wednesday during a choppy session as the asset class underperformed U.S. Treasuries. The JP Morgan EMBI Global index widened 4 basis points versus Treasuries while returns were down 0.1%.

Earlier in the session, Treasuries were given a lift on comments made by Kansas City Federal Reserve president Thomas Hoenig late Tuesday. He said that monetary policy was "very close to where we need to be."

But then U.S. government bonds dipped on comments made by Treasury secretary John Snow who said that Friday's numbers would be "good numbers."

At session's end, the yield on the 10-year note stood at 4.83% compared to Tuesday's close of 4.894%.

Nonetheless emerging market trading volumes continue to be at a standstill in anticipation of Friday's non-farm payroll numbers, as investors are hoping the data will prove to be window into future Fed action.

One debt strategist offered another explanation for the market's illiquid session.

"As far as I can tell all EM debt guys are trying to get a plane out of Sao Paolo," he said, referring to the annual meeting of the Inter-American Development Bank, which ended on Wednesday.

The session started off quiet and for the most part remained so throughout the day, noted a trader. There was slight intra-day volatility on Treasuries but overall the session was nondescript, he added.

In late trade, the Brazilian bond due 2040 was spotted at 128.50 bid, 128.55 offered, unchanged for the day. The Argentinean par bond due 2033 was quoted at 98.10 bid, 98.75 offered, down 0.15. The Colombian bond due 2033 was seen at 139.50 bid, 140.50 offered, up 0.10.

Moreover, the market is trading at historic tights, but from a volatility perspective the market is failing to move in one direction another, unwilling to give up an inch, as one market source put it.

"Emerging market debt has had a lot of spread compression and out-performance," remarked the cautiously optimistic debt strategist.

"And it's got...challenges: hold on to current valuations...and for that to happen, it means that government policies cannot get all relaxed and complacent," he said.

"They have to maintain the pace of reforms that is indebted into current pricing."

A pullback in policy will result in spread widening, lower dollar prices and less liquidity.

Election fears

Furthermore, there is investor anxiety as to whether some emerging markets, such as Peru, may move to the left during this year's election cycle.

Brazil is likely to maintain policy continuity, whether or not president Luiz Inacio Lula da Silva or Sao Paulo governor Geraldo Alckmin of the Brazilian Party of Social Democracy (PSDB) wins the presidential elections, noted the strategist, adding that the country does need to tackle other challenges such as curbing public spending.

Mexico faces a high profile election. And while the candidates appear to be on the same page when it comes to macro-policies, the contenders have yet to articulate their agendas regarding micro policies, observed the strategist

"There's a real question as to whether anyone can pass anything through the Mexican congress that would in any way inconvenience any of the vested interests that have been anti-reform."

Meanwhile whether or not the strategist will add more risk on such events as market dips depends on the evaluation of fundamentals.

"If we felt there was a change in fundamentals and people were going down a path that would be less credit friendly, which would be integrated by widening spreads, we'd probably looking to reduce," he said.

However, if it were a case of uncertainty volatility coupled with improving fundamentals, the strategist would look to buy on dips.

"I'm not sure that you are going to have a market-wide answer between those two polls. I think it's going to be country by country.

"I would expect some dispersion of return rather than the kind of bunching, all boats rise kind of thing we've seen in the markets."

Peru continues slide

In other news, Peruvian bonds continue to slip on election uncertainty. This Sunday, the country holds elections where the probability is high that no candidate will pull out 50% of the vote to win the presidency. This election has become about who will be the two top contenders in May's run-off election.

And the market is not pleased that the polls are indicating that nationalist Ollanta Humala is the front-runner.

Spreads for Peru were wider by 11 basis points in trading Wednesday. During the session, the Peruvian bond due 2012 came down 1.50 to 109.50 bid, 110.50 offered while the bond due 2033 lost 0.75 to 109.25 bid, 109.75 offered.

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