Emerging market debt edges lower on hawkish FOMC; Argentina to issue new bonds Thursday

By Reshmi Basu and Paul Deckelman

New York, April 11 - Emerging market debt retreated slightly Wednesday as the market traded in sympathy with weaker U.S. equity markets on the back of hawkish minutes from the FOMC.

In the primary market, the government of Argentina plans to issue a dollar-denominated offering of new bonds due April 17, 2017.

The size of the deal will range from $500 million to $750 million.

The ministry said the new bonds, which are called Bonar X, will bear a coupon of 7%.

Pricing is expected to take place Thursday, April 12 while settlement is scheduled for April 17.

Coming from Hong Kong, Wing Hang Bank Ltd. set price guidance for a $300 million offering of perpetual bonds at mid-swaps plus 85 to 90 basis points.

The bonds will be non-callable for 10 years.

Citigroup, HSBC and UBS Investment Bank are lead managers for the Regulation S sale.

The roadshow is scheduled to wrap up in London on Thursday, April 12.

Adding to the corporate pipeline, Kuala Lumpur-based Maybank plans to sell a $300 million offering of Islamic subordinated bonds (Baa1/BBB+/BBB+).

The Sukuk bonds will be non-callable for five years.

Aseambankers Malaysia Bhd, HSBC and UBS are lead managers for the issue, which will be issued via MBB Sukuk Inc., a special-purpose company established by Maybank to issue subordinated trust certificates.

The proceeds from the sale will be used to fund Maybank's Islamic banking operations and for general Islamic purposes, according to the ratings statement released by Standard & Poor's.

EM weaker on equities

Returning to trading, emerging market debt witnessed a weaker session Thursday, as the market tracked a softer U.S. equity market following the release of the minutes from the Federal Open Market Committee's last meeting, which suggested that more rate hikes may be necessary to curb inflation.

During the Asian overnight session Wednesday, volumes were higher across the spectrum following a week of lackluster flows.

Fast money and real money accounts were active, according to a market source.

At the close of the Asian session, the long-end of the Philippines curve had added 2 points, capitalizing on the market's momentum.

Meanwhile as the New York session rolled around, the sentiment changed slightly following the FOMC statement. The hawkish minutes did not feed into a selling frenzy as investors appeared comfortable with the current outlook for the U.S. economy, noted sources.

But the market edged lower on a price basis.

"Minutes were not earth-shattering," remarked a source. "You saw prices ease but nothing major."

Among benchmark names, the bellwether Brazilian bond due 2040 gave up 0.20 to 134.75 bid, 134.80 offered. The Mexico bond due 2026 eased 0.25 to 163.25 bid, 164 offered. The Venezuela bond due 2027 lost 0.10 to 124.65 bud, 124.80 offered.

Ecuador's outperforms

Ecuador's bonds continued to firm on Wednesday, pushed northward for a second straight session by investor optimistism that the new left-leaning government of president Rafael Correa will not default on its debt as a political weapon.

The country's 10% notes due 2030, which had risen a point in Tuesday's dealings, were up another ½ point to 91 bid, their highest level since Nov. 30, just after the Ecuador's election in which Correa rode to victory by promising expanded social welfare spending and criticizing the country's more than $11 billion of foreign debt, hinting that Quito might follow the example of Argentina, which defaulted on its foreign debt earlier in the decade, forcing investors to accept new debt at considerably less-favorable terms.

The spread on the bonds versus U.S. Treasuries, which on Tuesday had narrowed by 18 basis points, came in another 12 bps on Wednesday to 603 bps, while the yield on the bonds fell 7 bps to 11.08%.

Ecuador's bonds have firmed smartly since hitting their lows at a dollar price of around 67 in late January, turning north when the finance minister, Ricardo Patino, expressed willingness to work with the country's creditors rather than try to impose a settlement on them, Argentina-style.

Asia weaker on U.S. equities

A New York-based trader in Asian issues meantime said that the market "softened a bit in line with weaker equities," which were pushed lower by Wall Street's reaction to the release of the minutes of the March meeting of the FOMC, which indicated that U.S. central bank has by no means ruled out the possibility of an interest rate hike should inflation remain a problem.

He said that there had been "a little bit of a pullback in some of the more actively traded areas," particularly in CDS contracts on Philippine and Indonesian sovereign debt, which he said had widened "3 or 4 basis points off recent tights."

He saw the 5-year CDS contract insuring holders of Philippine government debt against a default at levels of 113-116 bps, about 3 bps wider than at the start of the session. CDS contracts linked to Indonesian debt, he said, were "about at the same level."

The cash bonds underlying those CDS contracts was "actually holding better," with the bid side on the long end of Philippines government bond curve down perhaps ¼ point from the levels seen at the close of trading in Asia earlier in the day.

He noted that given the bearish news coming out of the Fed, "[U.S.] Treasuries have dropped as well, so on a spread basis, we're probably only 1 or 2 [bps] wider."

He said there had also been some selling in areas such as Japanese bank capital, and the bonds of Hong Kong-based conglomerate Hutchison Whampoa Ltd., a fairly actively traded investment-grade issue. However, he said there had been "nothing too dramatic - but [it was] a little bit of a pullback from our recent tights - and in some cases, our all-time tights."

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