Emerging market debt down on profit taking, inflation worries; Indonesia to sell $1.25 billion

By Reshmi Basu and Paul A. Harris

New York, Oct. 4 - Emerging market debt sold off Tuesday on profit taking as inflationary concerns raised their head.

In the primary market, the Republic of Indonesia set initial price guidance for a $1.25 billion offering of $750 million in 10-year bonds and $250 million in 30-year bonds.

Guidance for the bonds due January 2016 has been set at 7 5/8% to 7¾% while the bonds due October 2035 are talked at 8 5/8% to 8¾%.

The announcement drove down Indonesian bond prices by about one point, said a trader, who added that the transaction is being conducted in a much more orderly fashion than in the past.

"We've probably seen the brunt of it [the sell-off]," said the trader.

"It feels likes we've reached the floor here.

"Bonds are down from 7/8 to a point. The momentum of the market now...is to keep trading up instead of trading down," he added.

Furthermore, the recent suicide bombing in Bali, which killed 19 people and wounded more than 130 others, will not play a role in whether or not investors decide to play, according to an emerging market analyst.

"I think the market has grown accustomed to these bombings and has come to realize that they do not pose significant threats to the credit outlook.

"Maybe a more spectacular bombing might make investors think twice, but for now the most recent Bali bombing is seen more as an irritant than as a major crisis," he said.

He added that Indonesia is taking advantage of the good will it has earned from cutting oil subsidies, which were pressuring its state coffers.

"Raising prices was an excellent sign of policy discipline, and while it carries political risks I think investors will be much happier to lend to Indonesia now that it has addressed the fuel subsidies problem," he noted.

Citigroup, Credit Suisse First Boston and Merrill Lynch are running the Rule 144A/Regulation S transaction.

EM sees sell-off

Speeches from Federal Reserve officials Tuesday highlighted inflationary concerns, signaling more Fed rate hikes lie ahead.

Treasuries saw little movement Tuesday as the yield on the 10-year note declined to 4.38% from Monday's close of 4.39%.

"There is no confirmation about a slowdown in the U.S.," said Enrique Alvarez, Latin America debt strategist for research firm IDEAglobal.

"The inflation story is starting to get more momentum than the slowdown story and that's a negative for anything related to U.S. Treasury rates," he noted.

And that negative sentiment carried over to emerging markets, which saw a sell-off on profit taking.

During the session, the Brazil bond due 2040 fell 0.90 to 121.65 bid.

But Brazilian bonds also came under pressure on profit taking in the equities market, which has been overheating of late, observed Alvarez.

"More importantly, you had the central bank come in and intervene in the currency market, driving the rate above 2.25 - where it been trading at 2.22 and looking to go to 2.20.

"That has cooled some of the enthusiasm on the domestic front," remarked Alvarez, which resulted in domestic investors cashing in where they can.

Brazil's component of the JP Morgan EMBI+ was down by 0.77% while its spread widened by 15 basis points over Treasuries. Venezuela and Ecuador's component of the EMBI kicked out by 19 and 20 basis points, respectively.

However, emerging market is not re-pricing since spreads are not compensating for the market's recent over-performance, noted Alvarez.

"The market is accommodating to a different level. It's taking a little bit of profits. It's widening from a very tight historical level. But it's still not re-pricing," he said.

Whether or not this sell-off will be more than a temporary bout will depend on whether Treasuries keep their current level. When Treasuries punch at the 4.30% level, emerging markets become nervous. If Treasuries make a stab at 4.40% to 4.45% range, the market becomes very nervous and prolonged selling may occur, observed Alvarez.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.