Emerging market debt up on revised GDP number; Uruguay sells peso-denominated debt

By Reshmi Basu and Paul Deckelman

New York, March 29 - Spreads for emerging market debt narrowed Thursday on the back of firmer U.S. stocks, following an upward revision to U.S. gross domestic product growth for the fourth quarter.

In the primary market, the Republic of Uruguay sold an upsized $500 million equivalent offering of peso-denominated 20-year inflation-linked bonds (B1/B+/B+) at par to yield 4¼% over inflation, according to a term sheet filed with the Securities and Exchange Commission.

The deal, which was increased from $300 million equivalent, is denominated in pesos while the principal will be paid in dollars. Interest is payable at a 4¼% annual rate, adjusted to reflect Uruguayan inflation from the issuance date through the relevant interest payment date.

Deutsche Bank and Merrill Lynch were joint bookrunners for the deal.

In the secondary, the country's external debt was pressured by the new issuance. In trading, the Uruguay bond due 2022 gave up 0.25 to 113.25 bid, 114 offered.

In other primary news, Hong Kong property developer Lai Fung Holding set price talk for an offering of up to $200 million in seven-year fixed rate senior notes (B1/B+) in the area of 9¼%.

Proceeds from the sale will be used towards the acquisition of land and property projects, for project development, for property improvements and for general working capital purposes.

Deutsche Bank and HSBC have been mandated as joint lead bookrunners for the deal.

EM tightens on appetite for risk

Recently emerging market debt has traded within narrow spreads as investors have been comfortable sitting on current positions as they face a confluence of risks such as escalating geopolitical risk in the Middle East and the murky picture for the U.S. economy.

But on Thursday, U.S. economic data pointed to a more supportive outlook for the economy, which helped spreads tighten while returns were flat on a dollar basis.

During the session, the JP Morgan EMBI+ index narrowed 3 basis points to 166 basis points, which falls just short of another record low.

The Commerce Department reported that the economy expanded at a 2.5% last quarter, upped from the 2.2% reported previously. Within the GDP report, inflation numbers came in better than expected. Core personal consumption expenditure price index was left alone at 2.2%. Also adding support, there was a drop in weekly jobless claims.

As a result of a more benign inflation picture, U.S. stocks rose 48.30 to close at 12,348.75. Against a more supportive backdrop, emerging market debt gained some momentum on a spread basis.

"The market has operating on a day-to-day basis," said a market source, who added that the Thursday's GDP release gave some investors an incentive to add to their positions.

Nonetheless, trading volumes remained on the lighter side.

"There are too many uncertainties out there and no one wants to get burned on a miscalculation," he added.

"That being said, fundamentals are good."

Among benchmark names, the Brazilian bellwether bond due 2040 added 0.05 to 134.70 bid, 134.75 offered. The Russian bond due 2030 gave up 0.19 to 113.50 bid, 113.563 offered. And the Turkish bond due 2030 gained 0.13 to 153.625 bid, 153.875 offered.

Elsewhere, Ecuador and Venezuela posted gains on a surge in oil prices. Ecuador's spreads narrowed by two basis points while the latter came in by one basis point.

There were also better bids seen for smaller credits such as El Salvador and Panama, which along with Brazil, helped add to the firmer tone.

Inside Asia trading

Meanwhile during the Asian trading session Thursday, credits saw light activity, which was mostly dealer driven, according to a market source.

On the sovereign side, dollar bonds for Indonesia and the Philippines saw quiet trade while the credit derivative swap instruments were busy. At the opening of Asia, spreads for their CDS widened by 5 basis points. By the time the London opening rolled around, spreads had narrowed by 5 basis points.

In New York trade, both cash bonds remained range-bound. By the end of the session, the Indonesian bond due 2035 was up 0.03 to 122.625 bid, 123.125 offered. The Philippine bond due 2025 was unchanged at 141.87 bid, 142.62 offered.

Next up, PCE data

A week ago, emerging market debt rallied on a more dovish statement by the Federal Reserve, which the market interpreted as that the central bank was leaning towards a rate cut. But since then, mixed economic data in the United State, particularly in the housing market, has muddled that outlook. And now investors are plowing through incoming data to shed any clarity as to what the timeline for the Fed is.

"Trading has been sort of lackadaisical," said the source.

Next up, investors will key in on Friday's release of the personal income personal consumption expenditures index, a favorite inflation gage of the Fed.

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