Emerging market debt shows resilience despite Treasury slump; Arpeni Pratama sells $160 million bonds

By Reshmi Basu and Paul A. Harris

New York, April 25 - Emerging market debt weathered a stormy U.S. Treasuries session Tuesday as the yield on the 10-year Treasury note shot up past the 5% handle.

In the primary market, Indonesian shipper Arpeni Pratama Ocean Line Investment BV priced a $160 million issue of 8¾% seven-year senior notes (/BB+/BB-) at 98.976 to yield 8.95%.

The yield came inside of the 9 1/8% area price talk.

The deal was well received, according to a market source. By the time of launch, the sale was eight-times oversubscribed with $1.3 billion in the books from 98 different accounts.

Hong Kong made up 30% of the pool, followed by Europe with 28%, Singapore with 20%, the United States with 17% and Indonesia with 5%.

Citigroup was the bookrunner for the Rule 144A/Regulation S issue.

EM survives Treasuries sell off

U.S. government bonds sold off Tuesday following the releases of strong economic reports that fueled speculation that the Federal Reserve will raise short-term rates by more than originally anticipated.

The consumer confidence index rose to a four-year high in April despite escalating oil prices. Additionally, there was an unexpected increase in sales for existing homes. At session's end, the yield on the 10-year note jumped to 5.07% from Monday's close of 4.98%.

While Treasuries were rocked, the performance of emerging markets debt was rock solid, once again demonstrating its knack for ignoring Treasury volatility.

Market sources described the asset class as resilient, partly due to the commodity story.

In the last week, emerging markets has appeared insulated from Treasuries, which is surprising considering how soft inflows have been, observed a buyside source.

"Spreads are still tight. I thought we were getting to a point where I thought we could have some correction, but apparently the market disagrees with me. The EM rally continues or at least it's tightening," he noted.

During Tuesday's performance, most countries were unchanged on a spread basis. The Brazilian bond due 2040 fell 0.60 to 127.65 bid, 127.75 offered. The Colombian bond due 2033 slipped 0.75 to 137.50 bid, 138.50 offered. The Mexican bond due 2033 lost 0.75 to 109.25 bid, 109.75 offered. The Russian bond due 2030 shed 0.50 to 108.25 bid, 108.875 offered.

Cash on the sidelines

It is a foregone conclusion that interest rates in the United States are moving higher. And to counter that move, the buyside source said he has been underweight for some time now.

The other strategy, he suggested, is for investors to keep their duration short in order to reduce their exposure to interest rate risk.

"Limit your spread duration and look at floaters," he noted.

However, the source conceded that he is no longer too worried about the interest rate story "given the back-up we've had.

"It's [Treasuries] not such a risk. We've sold off about 60 basis points year to date in the 10-year Treasury," he noted.

Instead his issue with emerging markets is how tight spreads are, which has made the search for "value" quite a tough chore for him.

"I'm carrying more cash than anytime that I have in the last five years," he told Prospect News.

Nonetheless, less cash being put to work has not slowed down the market, which signals decent cash positions.

And while others have explored local markets, the buyside source sees that as another sign of the search for yield.

Peruvian election run off

In other developments, Peru's former president Alan Garcia would beat out nationalist Ollanta Humala in a presidential run-off, according to the most recent poll by Datum Internacional.

But as investors have learned, polls in Peru mean very little, noted sources.

Whether or not the buyside source will increase his exposure to Peru depends on how the election plays out as well as what the market is willing to give.

This investor likened the Humala versus Garcia match up as to whether or not you want "one of your feet chopped off or both of them."

The market appears to be putting a premium on any candidate other than Humala. But the buyside source pointed out that Garcia's record as president from 1985 to 1990 was pretty dismal.

But perhaps there is silver lining to the cloud. Peru's current president Alejandro Toledo has accomplished very little during his administration. On top of that, his popularity is in a shambles, according to the buyside source. But yet Peru has been able to pursue stable economic policies.

"Maybe Peru doesn't need a president?"

An outcome of a gridlocked congress coupled with little policy change would not necessarily be bad, remarked the source.

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