Emerging market debt in limbo on Carnival, economic data; National Bank of Abu Dhabi issues new paper

By Reshmi Basu and Paul Deckelman

New York, Feb. 20 - Emerging market debt stayed in lockdown mode Tuesday as many Latin American markets were closed for Carnival festivities and new year holidays slowed activity in Asia.

In the primary market, National Bank of Abu Dhabi placed a £350 million offering of five-year notes (Aa3/A/A+) at 99.97 to bear a spread of 66 basis points more than Gilts.

Barclays Capital and the Royal Bank of Scotland were the bookrunners for the deal, which was issued under the bank's euro medium-term note program.

Returning to the broader market, overall trading volumes were muted ahead of two anticipated market events, observed sources.

On Wednesday, the U.S. Labor Department will release the consumer price index data. Also on the calendar is the much anticipated interest rate decision by the Bank of Japan. There has been some caution leading up to the decision as investors worry about the potential unwinding of the emerging market carry trade.

Most market participants are discounting a 66% probability of a 25 basis point rate hike while such firms including JP Morgan are expecting the next rate hike to take place in March, noted an analyst.

Overall, the JP Morgan EMBI Global index was flat on the day while spreads narrowed by one basis point versus U.S. Treasuries.

Asia turns off amid celebrations

Turning to Asia, a trader in Asian debt called his market "dead - nothing happening."

He noted that with the Lunar (Chinese) New Year celebrations under way in the Orient, ushering in the Year of the Pig, "Hong Kong was closed, and that lack of interest in trading [throughout the region] carried over to New York."

Among Asian benchmark names, the Indonesian bond due 2015 was unchanged at 108 bid, 108.50 offered. The Philippines bond due 2025 was down 0.13 to 142.50 bid, 143.125 offered.

Hangover effect in Latin America

It was pretty much the same story in Latin America, where the Brazilian market - the largest and most liquid in the region - was shuttered for Carnival, as throngs of merry-makers made their way through the crowded streets of Rio.

A trader said that made for "a relatively quiet day" throughout the Latin American region.

"Spreads were probably within a basis point or two of Friday's levels, and volumes were on the extreme light side."

He observed that prices were quoted higher because U.S. Treasuries were up on a little on the day, "but spreads didn't really do too much."

He saw no particular issues standing out, opining that "it seemed like one of the lighter days of the year so far."

Among Latin American benchmark names, the Brazilian bellwether bond due 2040 added 0.10 to 133.80 bid, 133.90 offered.

In other developments, Ecuador was the session's out-performer.

And the Venezuelan bond due 2027 gained 0.15 to 124.70 bid, 125 offered.

Colombia down on minister resignation

In country specific news, Colombian external debt was in the red Tuesday in response to the resignation of foreign minister Consuelo Araujo on Monday.

But the local markets shrugged off the news, remarked one source.

Araujo resigned Monday as the government of president Įlvaro Uribe has been battling a brewing political firestorm. It has been revealed that there are ties between the country's right wing paramilitary cocaine-trafficking groups and some of the president's most visible political supporters.

Uribe named Fernando Araujo, a former development minister, to take over the post. Araujo was held captive for almost the past six years by the FARC, the Revolutionary Armed Forces of Colombia. He escaped in December.

Furthermore opposition leaders are calling for early congressional elections "so that the legislature (as an institution) can clear itself of accusations of illegitimacy," wrote Alberto Bernal, fixed income analyst at Bear Stearns, in a research note.

"We think that the risk of new congressional elections being scheduled is quite low, but rumors may linger in the markets.

"We believe that political noise having to do with the Congress being closed for new elections could prove to be a drag on asset prices," he added.

Nonetheless, he said that the firm maintains an outperform recommendation, despite the credit's recent underperformance. The firm said it believes that Colombia is an improving credit story.

"We think that the long end of the Colombia curve is still delivering a material yield pick-up relative to Brazil.

"We continue to argue that there is no compelling reason that Colombia should trade wide to Brazil (Brazil '37s are trading 34 bps tight to Colombia '37s). On the contrary, Colombia's fiscal and economic fundamentals are better than Brazil's," Bernal noted.

During Tuesday's trading session, the Colombian bond due 2033 eased 0.25 to 143.60 bid, 144.25 offered.

Mexico's local debt unmoved

In local currency-denominated bonds, Mexico's peso-denominated notes were little changed on the day, with the yield on its 8% issue due 2015 quoted holding steady at 7.7%. Some observers believe the bonds may firm a bit immediately ahead of Thursday's scheduled release of a new economic report, which is expected to show inflation coming under control, particularly prices of corn tortillas, a staple of the Mexican diet whose price had previously been rising with the diversion of some corn supplies into ethanol production.

Expectations of progress in battling inflation have caused bond yields to tighten over the past three weeks, with the yield on the 8s backing down from recent late-January peak levels at 8.09%.

Digicel talk seen Wednesday

Back in the primary, Caribbean wireless telecommunications network operator, Digicel Group Ltd., is marketing $1.4 billion of eight-year senior notes in two tranches which are expected to price on Thursday.

Digicel is offering $1 billion of cash-pay notes and $400 million of PIK toggle notes via Citigroup and JP Morgan.

An informed source told Prospect News that price talk is expected on Wednesday, with pricing to follow on Thursday.

The source added that Digicel's existing notes firmed during the Tuesday session.

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