Friday's CPI numbers make it a "great day" for emerging markets; Vitro Envases, VTB price

By Reshmi Basu

New York, July 16 - Emerging market paper roared on soft CPI numbers as the positive tone continued to gain momentum Friday.

"Trading was great today," said a trader. "Everything was up today" and "well bid".

A market source confirmed the secondary was doing "very well" and was well bid."

"Tone remains very constructive across most of the asset class right now.

"It's taking its cue largely from the strength of the Treasury market and the constructive environment in the investment-grade corporate market as well," said the source late morning.

"You had a very strong rally in the 10-year note. The Treasuries have rallied probably 10 to 12 basis points and that's what's giving the backdrop of the tone in the emerging markets as well."

Overall, emerging market debt paper was up - way up during Friday's session. The JP Morgan EMBI Global index soared 1.07%. Its spread to Treasuries tightened six basis points to 454 basis points.

VTB, Vitro price

In primary action, two corporates came to market.

Russian Vneshtorgbank priced $300 million of three-year notes (Baa3/BB+) at par to yield Libor plus 290 basis points.

The deal - structured as loan participation notes - came at the tighter end of price guidance of 287½ to 312½ basis points over Libor.

Barclays Capital, ING and HSBC Bank were the bookrunners for the Regulation S deal.

From Mexico, glass manufacturer Vitro Envases Northeamerica, SA de CV priced its upsized $170 million of seven-year notes (B2/B+) at 95.315 to yield 11¾% via Citigroup.

The deal was increased to $170 million from $150 million and the tenor was decreased to seven years from 10 years.

In secondary trading, the new issue traded up just over a point to 96½ bid in late morning.

Meanwhile, upcoming supply is concentrated in the big high-grade Asian issues of the kind seen in the market in recent weeks. Among the deals in the pipeline are benchmark-size offerings from Export-Import Bank of China and India's ICICI Ltd.

One notable exception to the trend is Russia's Gazprom, scheduled to bring a benchmark deal in the week of July 19 via ABN Amro Holding NV, Merrill Lynch & Co. and Morgan Stanley;

"None of the big sovereigns are currently planning to do something. Turkey may pop up here and there," said the market source.

"Turkey is focused on the euro-currency. But you never know.

"If they don't see the execution as necessarily providing them with what they are looking for, they have some opportunities in dollars that they can quickly access," he said.

Rally will turn to profit-taking, predicts strategist

The consumer price index was up just 0.3% in June, half the previous month's number.

And emerging market paper rallied on that data Friday morning as the consensus is that U.S interest rates will not increase as aggressively as the market was pricing in, according to a debt strategist at Refco EM.

"The perception is that the trend will continue into next week," said the strategist.

"Volume was heavy in the morning," he said.

However, nagging questions about the sustainability of the rally surfaced during the day.

"I see a lot of profit-taking happening next week

"At least some of our accounts are getting into positions, which only until now are showing green numbers from three to four months ago.

"This is a good rally to take advantage of for a couple of days and then take some profits," added the Refco strategist.

Brazil led the way during Friday's session. Its bond due 2040 was up 2.1 points to 98.8 bid while the C bond was bid at 94.937, up 1.187. Its component of the EMBI surged 1.80%. Its spread to Treasuries tightened 25 basis points.

Furthermore, Brazilian corporates were given a lift on the CPI numbers and the U.S. Treasury rally, said an emerging market analyst.

Colombia was higher by one to a one and a half points Friday and Venezuela showed a good rally, noted the strategist.

Russia was also up. The Russia bond due 2030 was up a quarter of a point to 92.125 bid. Its component of the EMBI was up 1.25%.

CPI number lifts Latin America

Friday's core inflation number was an important push for the carry trades in Latin America, according to Alberto Bernal, head of Latin America research at think tank IDEAglobal.

The core inflation number rose 0.1%, half of what economists had anticipated.

"That is very positive for the fate of Latin American paper because as long as inflation remains subdued here then it makes sense for crossover investors, hedge funds and other accounts to continue looking for good sources of yield.

"And those come, in a large part, from Latin America."

The impact of the news was felt immediately as Brazil's Real rose to 2.99 at 1pm ET from Thursday's close. The currency was up a very impressive 0.8%.

"It is an important move for the day, especially because it broke the psychological barrier of three.

"So what it means is that flows are coming back to Brazil, because it makes sense to remain invested in a country that pays you those yields when the Fed is unlikely to move fast," said Bernal.

The good news on the CPI front may lure back bidders, but inflation is on the rise.

"Putting the whole thing into perspective, it is not a fundamental change of direction.

"The world has entered a period of decreased levels of liquidity - meaning that rates of growth have been strong and inflation had been adjusting for a very long time.

"In my view, we're still on the same path towards higher inflation.

"The only difference from two months ago is that the velocity of that adjustment is proving to be much less intense than some people were expecting," Bernal told Prospect News.

And on that sentiment swing, stability has returned to the market as well as additional buyers in Latin America.

"That is not to say that we are going to see Brazil rallying 50% this year.

"We are very close to the top levels, in our view, in terms of the price of Brazilian bonds.

"We're not too hopeful on capital gains from holding this paper," he added.

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