Emerging market debt sluggish ahead of U.S. economic data; Buenos Aires to issue new debt

By Reshmi Basu and Paul Deckelman

New York, Feb. 26 - Emerging market failed to gain traction Monday amid softer U.S. equities. Overall, the market saw sluggish trading in the absence of any major credit drivers to push the market in one direction or another.

In the primary market, the Province of Buenos Aires (B3/B+) plans to issue a $425 million offering of fixed-rate senior notes via Barclays Capital and Deutsche Bank.

The amortizing notes are expected to mature in March 2028. The notes will also be non-callable for life.

Proceeds will be used for general corporate purposes, for debt amortizations and for capital expenditures. The expected issue will complete the province's financing needs in 2007.

The deal sold under Rule 144A and Regulation S.

Pricing is expected to take place on Wednesday.

EM underperforms Treasuries

Turning to the broader market, the emerging market asset class was unable to keep up with the strong rally in U.S. Treasuries, which saw the yield on the 10-year note fall to its lowest level since Jan. 5, 2007.

U.S. government bonds rallied ahead of this week's string of U.S. economic data, including the anticipated revisions to fourth quarter gross domestic product.

A confluence of events is keeping investors on the sidelines, noted market sources. The rift over Iran's nuclear ambitions along with nervousness over the U.S. sub-prime mortgage market has triggered some flight to quality, which has resulted in range-bound trading for emerging markets.

"The market is looking for a large catalyst," said Enrique Alvarez, Latin America debt strategist for think tank IDEAglobal.

"Otherwise, it's pretty much dead in the water. It's happy and content to have absorbed whatever supply is out there," he said.

Moreover, with the market hovering around historically low spreads, investors appear content to sit at these levels.

In secondary trading, the Asian session extended last week's quiet tone as benchmark sovereigns such as Indonesia and the Philippines saw light volumes. At the end of the Asian session, the long end of both sovereigns outperformed by about ¼ to 1/8 of a point, according to a market source.

Meanwhile the lack of spirited trading spilled into the New York trading day. Higher beta names such as Venezuela, Turkey and Argentina emerged as the session's losers.

Among benchmark credits, the bellwether Brazilian bond due 2040 added 0.05 to 134 bid, 134.05 offered. The Argentine discount bond due 2033 lost 0.10 to 115.25 bid, 115.65 offered. And the Turkish bond due 2030 shed 0.25 to 153.75 bid, 154.125 offered.

Meanwhile Peru saw some profit-taking, following last week's announcement by the government that it will purchase Brady bonds as well as its global bonds due 2012 as part of its tender offer.

In trading, the Peruvian bond due 2012 gave up 0.15 to 117 bid, 118 offered.

Latin America wider

A trader in Latin American debt said that generally, "our spreads were probably wider on the day. Treasuries have outperformed us."

He said that from where he sat, nothing really stuck out, one way or the other, as "most of the credits were pretty much uniform, in terms of their underperformance" versus Treasuries.

He said that the $1.5 billion of new "Bond of The South" issue launched jointly by Venezuela and Argentina on Monday was not seen in secondary at all, saying it "basically went into the local Venezuelan banking system."

Venezuela was offering $750 million principal amount of 5¼% bolivar-denominated bonds due 2019, while Argentina was offering $750 million principal amount of 7% dollar bonds due in 2015.

Venezuelan officials said their half of the issue will be offered for sale to investors large and small through Thursday, and said they could pay in bolivars. Besides raising capital to fund its public debt service, Venezuela also hopes to absorb excess liquidity in the bolivars that is seen as inflationary.

In the Argentinean market, meantime, that country's inflation-linked bonds were reported to have eased on investor concern that Buenos Aires might again allegedly fudge its consumer price data in order to show progress in dealing with inflation.

The yield on the country's 5.83% inflation-linked bond due 2033 widened out by 5 basis points to 5.54% in Monday afternoon dealings.

An Argentinean business newspaper quoted government critics as saying the regime is likely to tamper with the methodology it uses to calculate education costs to keep rising tuition levels from affecting the February numbers, due out in early March, too much. The government denies any such plan.

Allegations of such book-cooking helped send Argentine debt lower earlier this month, especially after president Nestor Kirchner replaced the career civil service government statistics bureau official responsible for calculating the data and replaced him with a political appointee. The union representing the other statisticians charged that the new boss did not let them use their usual methodology in compiling the January CPI data.

The trader, however, said the market pretty much shrugged off the latest kafuffle over Argentina's numbers, noting that "that's story's been around the last couple of weeks, when the person in charge of the inflation calculations was let go and that started the rumor around that some of the economic numbers might not be what the market was expecting, so it's been out there for a little while."

He said that "in terms of it happening today [Monday], Argentina probably underperformed like a lot of these credits did."

The market, he reiterated, "was pretty much lackluster and underperformed Treasuries, but we had outperformed most of last week, so a little pullback in spreads was due."

Mexico's peso bonds softer

In Mexico, peso-denominated bonds, which had retreated Friday after the nation's central bank, the Banco de Mexico, warned that it would hike interest rates in March if core inflation did not begin to ease in that month, remained on the downside on Monday.

The yield on the local-currency 10-year notes was seen to have widened out by 17 basis points on the session to 7.98% while the 20-year peso notes' yield also ballooned out by that same amount, to 8.07%. The former bond's price was meantime down more than a point, and the latter was off nearly 2 points on the day.

Among Asian names, a trader saw MagnaChip Semiconductor Ltd.'s bonds quoted around, although he said the South Korean computer chip maker's paper "drifted up, and then back down, but all within a point or 11/2...It was just that I saw a lot of quotes in them. At least they were on people's screens."

He saw Magnachip's 8% notes due 2014 hanging in around a 72-74.5 context, while its 6 7/8% notes due 2011 were at 86.5 bid, 88 offered. "But that was just something that was quoted a few times," he added.

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