Emerging market debt nudges higher on Treasuries recovery; three corporates issue guidance

By Reshmi Basu and Paul A. Harris

New York, Nov. 7 - Emerging market debt edged higher Monday as U.S. Treasuries ended a four-day slump.

In the primary market, three corporate issuers announced price guidance for their deals.

From Asia, the Export-Import Bank of Korea is talking its proposed $500 million issue of five-year floating-rate notes at a mid to high 20s basis points spread to Libor.

Credit Suisse First Boston, HSBC and UBS are the underwriters.

Mexico's Controladora Mabe SA de CV (MABE) set price guidance for a $200 million offering of 10-year notes (/BBB-/BBB-) in the area of 200 basis points more than Treasuries.

Citigroup and ABN Amro are running the Rule 144A/Regulation S sale.

Elsewhere, Alliance Bank JSC Kazakhstan, via its financing vehicle ALB Finance BV Netherlands, (Ba2//B+ expected) set price guidance for a minimum offering of $200 million in five-year bonds at 9 1/8% to 9 3/8%.

ABN Amro and Citigroup are running the Regulation S transaction.

Adding to the pipeline, Bank of Moscow, via Kuznetski Capital SA, plans to issue $200 million of lower tier II notes (Baa1//BBB-).

Barclays Capital and Merrill Lynch are managing the Regulation S transaction.

Out of India, ICICI Bank (Baa3/BB+) plans to issue $300 million of five-year senior fixed-rate notes this week via Deutsche Bank and Merrill Lynch.

Brazil's Centrais Eletricas Brasileiras SA (Eletrobras) plans to price a $300 million offering of notes during the upcoming week.

Dresdner Kleinwort Wasserstein has the books for the notes, which are expected to mature in seven to 10 years.

EM up as Treasuries end slide

Emerging market debt moved higher as U.S. Treasuries ended a four-day sell-off ahead of this week's quarterly refunding. The Treasury plans to auction $44 billion of new paper, which includes $18 billion in three-year notes on Tuesday, $13 billion of five-year notes on Wednesday and another $13 billion in 10-years on Thursday.

At the close of trading Monday, the yield on the 10-year note was quoted at 4.64%, down from Friday's close of 4.67%.

During the session, the spread on JP Morgan EMBI+ Index was tighter by two basis points as the market tracked Treasuries, said a trader.

Also, emerging markets the asset class took comfort from the rally in U.S. equities on lower oil prices, according to market sources.

Latin American credits such as Brazil and Colombia along with Treasury-linked credits saw higher prices during the session, according to Enrique Alvarez, Latin America debt strategist for IDEAglobal.

"It's been more a creeping up more than anything else," he said.

During the session, the Brazil bond due 2040 added 0.40 to 120.05 bid, 120.15 offered. The Colombia bond due 2012 gained half a point to 117¼ bid, 118¼ offered. The Mexico bond due 2033 moved up 0.35 to 112.35 bid, 113.15 offered.

Alvarez also added that the some Latin American credits benefited from this weekend's visit by president George Bush to the region.

"It generates an automatic enthusiastic type of pull in individual credits," he said, adding that this "pull" happens whenever a senior U.S. official visits. However, Argentina may be the exception.

"In the case of Argentina, the relationship is just not there. To a certain degree, president Bush did throw some weight behind their negotiations with the IMF, but it wasn't a spectacular backing," Alvarez observed.

Investors have said that it is extremely critical that Argentina reach an accord with the International Monetary Fund.

EM comfortable with 10-year above 4.60%

Last Friday, the U.S. 10-year note stabbed 4.70% before closing at 4.67%. Nonetheless, sources said on Friday that the asset class held in despite increased volatility. It appears that emerging markets are somewhat comfortable with Treasuries trading above the 4.60% range.

But Alvarez noted that the market has not advanced all that much, since the Oct. 24 naming of Ben Bernanke as the next chairman of the Federal Reserve.

The 10-year Treasury was at 4.43% when Bernanke was nominated but it now looks as though the yield is unlikely to go back below a lower limit of 4.57% to 4.60%.

"That being said, the market doesn't want to go lower either," Alvarez added.

"There's still some level of comfort but I think it's more speculation on what U.S. rates may do further out than actual buying," he added

The last couple of weeks have seen very little buying due to defensive Treasuries, Alvarez noted.

"We're very over-priced for this particular level of yields in the U.S. Treasury curve," he observed, adding that spreads should be wider.

Moreover, higher Treasury rates will create greater potential for volatility in emerging markets, according to an emerging market analyst, who added that the market might not have passed the 10-year Treasury note's threshold level that would spark a massive sell-off.

"Rates at 4.65% are still very low by historic standards, especially when Y-o-Y inflation is running above 4%.

"Over time, though, further increases in U.S. rates will mean less and less demand for risky assets," he added.

In terms of issuance, he said there may have begun a deceleration in new issuance on the back of higher U.S. rates.

"October issuance levels were below year-ago levels, and November and December may be similar.

"The bottom still has not dropped out of the EM primary market, though, so I think that issuance totals should remain high, just not quite as high as they've been for much of the last year," he added.

Meanwhile November and December have been good months for the asset class. According to an analyst report, the JP Morgan EMBI Global has seen positive returns in November and December more than 80% of the time since 1994.

However, even with positive technicals, this may be quite a feat for the market in 2005.

Historical patterns have shown that that Latin American credits see a year-end rally, noted Alvarez.

"I think it's a very difficult thing to accomplish with spreads so tight, prices at historical highs and Treasury yields bound to go higher," he remarked.

Investors may shift their positions at the year-end.

"I don't believe that people are going to bail out," he said, adding that investors would sit on their positions unless Treasuries turn extremely ugly.

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