Treasury rally boosts emerging markets; Venezuela misses gains; long-planned deals surface

By Paul A. Harris and Reshmi Basu

St. Louis, March 8 - The focus during Friday's session in the emerging markets centered on existing issues, which were heard to have traded up on the back of a substantial rally in Treasuries.

Meanwhile pings were heard along the new issue pipeline, especially on the Asian front, as offerings that were rumored before Christmas began to take some shape.

And EmergingPortfolio.com Fund Research's Brad Durham said that present emerging markets volatility is largely Latin-specific.

Rising tide lifts (almost) all boats

Late Friday an emerging markets trader told Prospect News that a rally in the Treasury market, sparked by less-than-wonderful news on the U.S. employment front, caused existing paper to firm almost across the board.

"With the bid on the 10-year Treasuries, the (Brazilian) C bond closed higher," said the trader, who added that Mexican and Russian paper was also seen to firm

"Turkey closed higher," added the trader, "and I'm sure it's going to trade higher in the overnight market.

"Everything traded higher with the exception of Venezuela."

The source had Venezuela's paper due 2027 spotted at 84.75 bid, 85.75 offered, down 25 basis points.

"For a market that has really caught a vicious bid since the economic data Venezuela is rather disappointing," the trader commented.

"They came out with some details today about a domestic swap issue that will proceed next week."

Stirrings as Asian market seen open

Details surfaced Friday on four Asian corporate deals, three of which have been heard to be parked on the horizon for weeks.

Price talk of 9% to 9¼% emerged Friday on Philippine National Bank's $140 million of 10-year subordinated bonds (Ba1). JP Morgan will run the deal.

Details also emerged on India's Reliance Industries' $750 million five-year deal, which was heard to be coming in March, via Credit Suisse First Boston and ABN Amro.

Indonesia's Bank Mandiri is also expected to issue a dollar-denominated deal (B2/B), this one scheduled for the second quarter.

Finally, Medco Energi was heard to be bringing $200 million of five-year paper (B3/B+), via Credit Suisse First Boston and UBS Investment Bank, sometime during the remainder of the present quarter.

"There was a big pipeline of Asian issuance," the emerging markets trader commented.

"Maybe they're pushing it forward knowing that these are probably the ripest market conditions to do it in," the source added, noting the ballyhooed success of Indonesia's $1 billion sovereign deal earlier in the March 1 week.

"I've been hearing about Mandiri for a while," the trader said. "It looks like now they're coming out to take advantage of the environment in the market."

Volatility seen Latin-specific

Sources have been telling Prospect News that the emerging markets have undergone an increase in volatility that can be traced back to the U.S. Federal Reserve Federal Open Market Committee's late-January meeting, in which Fed chairman Alan Greenspan and his central bankers confirmed what most financial market observers had long anticipated: interest rates won't stay low forever.

At that point, observers said, the spreads on emerging markets paper had reached levels that were seen as extremely tight.

However, according to EmergingPortfolio.com Fund Research, which tracks 251 emerging markets bond funds, the volatility has been Latin America-specific.

"The recall referendum for Hugo Chavez in Venezuela is causing some volatility," opined EmergingPortfolio's Durham. "But also the political corruption scandal in Brazil, which is really the largest chunk of the EM bond market index (23%) is having a downward effect, although things seem to have quieted down in recent days."

Lula like Nixon-in-China

Meanwhile an emerging markets analyst took an even more dire outlook on Brazil.

"I have not been a believer in the rally in Brazilian debt for the last 20 points," the analyst said.

"I think it would be a better thing for Brazil over the next 20 years if they would default on their sovereign debt. Having said that, nobody wants to be the government that defaults on the debt. But if you look at the country they have real interest rates now of roughly 8%, and still a substantial debt overhang - although it's getting better over time - and zero growth.

"It's not an environment conducive to economic growth and a higher standard of living for the populace," the source added. "What's amazing to me - and it's a little bit like Nixon going to China - Lula is willing to squeeze the government's budget in order to satisfy the capital markets."

Following this line of reasoning, the analyst suggested that Brazil would actually be well served if it defaulted.

"If you look at Argentina for the three years before they defaulted on their debt, their fiscal situation is roughly the same.

"And they didn't grow for three years partly because of the interest rates that they had to pay on their debt.

"Brazil is very much in that same situation right now, so you can definitely construct a rosy scenario for the country, where trade surpluses slowly pay off the debt over time and interest rates stay low globally, so that the debt burden isn't that great, and the country gradually pays it way out of its debt burden.

"The cost of that is low growth.

"The better economic path for Brazil in the next 20 years is to default on the debt or restructure the debt and grow without an overhang going forward. From where I sit, it seems like Brazil should have defaulted on its debt over a year and a half ago."

Treasury rally helps nurse Indonesian hangover

The Republic of Indonesia's sovereign, which it sold during the March 1 week - in a massively oversubscribed deal that upsized to $1 billion and came with a 6.85% print - was reported to have softened somewhat, late Wednesday.

However, according to a trader, Friday's rally in U.S. Treasuries boosted the new Indonesian notes above par.

"With all of the hype, the minute they issued the bonds and made the allocations, it traded up to near par and then it drifted lower," the trader said.

"Today, because of the economic data and the massive bid on the Treasuries market, it traded higher."

The trader said that although he had recently seen Indonesia as low as the re-offer price, 99.285, the last level on Friday, on the back of the Treasury rally, was 100.125 bid.

"I don't care too much for the spread on this Indonesia deal," the trader added. "I mean, 277 basis points is really tight.

"And even at $1 billion, you will see these bonds for about another week, by which time, because of the demand on the part of the Asian banks, they will all be bought up, and you will never see them again."

Meanwhile an emerging markets analyst said he was not surprised by the demand for the deal, which was eight-times oversubscribed.

"It's commonplace now for any benchmark deal to be heavily oversubscribed," said the analyst. "It's probably an indication of how much cash people have sitting in their portfolio and or how much new mandate money there is in the emerging market space.

"It actually has been surprisingly difficult for some corporate borrowers to get their deals done," the source added. "But the bigger and better known names have been heavily oversubscribed for several months now."

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