Emerging market debt treks lower; ICICI Bank sells $350 million in tier 1 paper

By Reshmi Basu and Paul A. Harris

New York, Aug. 17 - Emerging market debt edged lower as investors cashed in on the strong performance seen in previous sessions.

In the primary market, India's ICICI Bank Ltd. sold $340 million of perpetual tier 1 bonds at 99.324 to yield a spread of Treasuries plus 247 basis points via Merrill Lynch & Co., JP Morgan and Morgan Stanley.

The deal came below price guidance, which was set at Treasuries plus 250 to 270 basis points.

The notes will come with 10 years of call protection. If the notes are not called, the coupon will step up by 100 basis points.

In trading, emerging market drifted lower on the back of U.S. Treasuries. U.S. government bonds were a tad down following the release of strong data by the Philadelphia Federal Reserve, which indicated that business activity in the Mid-Atlantic region jumped in August to 18.5, double market expectations.

U.S. stocks also saw slim gains as the Dow Jones Industrial Average index gained 7.84 points to close at 11,334.96.

Thursday's performance ended a two-day winning streak for emerging market debt, which saw spreads tighten on the back of a string of economic data that reinforced hopes that the Federal Reserve is done with further interest rate hikes. However, the robust Philly Fed report added some jitters on the expectation that the central bank may resume tightening.

"Spreads are maybe little bit wider today [Thursday]," observed a trader,

"Prices started off higher in the morning and drifted lower this afternoon."

For the first time since March, the benchmark Brazilian bond due 2040 pierced the 130 handle on Wednesday. During Thursday's session, the bond erased some gains but still hovered above 130 on the bid side, losing 0.05 to 130.50 bid, 130.60 offered.

Following the May/June sell-off, Brazil has made notable advances on a dollar basis. On June 24, the 2040 bond was trading around 121 on the bid side.

Elsewhere on Thursday, Argentina saw mixed flows in local currency and dollar-denominated fixed income instruments with offshore accounts acting as better sellers.

In trading, the Argentinean discount bond due 2033 lost 0.40 to 99.25 bid, 99.60 offered. And the Ecuadorian bond due 2030 was unchanged at 103.70 bid, 104 offered.

Dominican Republic up on S&P outlook

In other news, Dominican Republic bonds saw higher prices as Standard & Poor's revised its outlook on the country's B rating to positive from stable, citing a decrease in the country's public debt burden as well as advances on the economic growth front.

In trading, the country's bond due 2011 was up 0.25 to 108 bid, 108.50 offered while the bond due 2018 gained 0.50 to 111 bid, 112 offered.

Meanwhile there have been murmurings of considerable selling of Mexican debt by crossover accounts that are reallocating to high-yield and or high-grade markets, according to a source.

Mexico saw a more volatile trading Thursday than in previous sessions. Its foreign exchange market ended weaker following the two-day rally. The peso closed a tad weaker to USD/MXN 10.79, trading as high as 10.74 earlier in the session.

The sovereign's external debt tracked Treasuries lower. During the session, the Mexico bond due 2012 lost 0.05 to 108.80 bid, 109.20 offered while the bond due 2033 gave up 0.35 to 114.35 bid, 114.75 offered.

Thin volumes

Additionally, already light summer trading volumes thinned out even more than in prior sessions as investors took a break from the recent rally, remarked the trader.

In the absence of major U.S. economic data, there were no catalysts to drive the market one way or another like the economic releases seen earlier this week such as the producer price index and consumer price index, which came in better than expected.

Exactly what would shake up the market's near bullish sentiment is anyone's guess, noted a market source.

The market is expected to trade fairly well up until the Federal Open Market Committee meeting on Sept. 20.

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