Emerging market debt down on day two of profit taking; Indonesia sells $1.5 billion of bonds

By Reshmi Basu and Paul A. Harris

New York, Oct. 5 - Emerging market debt saw another bout of profit taking Wednesday as investors unwound their positions during a volatile session.

The market has been outperforming of late, said a trader, who added that investors wanted to cash in any case there was prolonged volatility. He noted that hedge funds were major players during the session.

"It's too early to tell whether this is the start of some sort of correction," he stated.

Meanwhile in the primary market, the Republic of Indonesia sold an offering of $1.5 billion of sovereign bonds (B2/B+/BB-) in two tranches Wednesday.

The country sold $900 million of bonds due January 2016 at 99.139 to yield 7 5/8%. Indonesia also priced $600 million of bonds due October 2035 at 98.666 to yield 8 5/8%.

By early morning, there was $2.5 billion in the books for the 2016 bonds and $1.8 billion in the 2035 bonds, said a market source.

Sources said that overall the deal performed well, given the downward pressure throughout Wednesday's session.

The 2016 bonds traded down in the secondary to 98½ bid from an issue price of 99.139.

"It started trading down, but not by that much," said a sellside source, who added: "The market wasn't quite there.

"There was volatility yesterday [Tuesday]. There was volatility today [Wednesday].

"So I guess they said, 'We need to get through this. We've been postponing for quite some time now.'"

Furthermore the sellside source noted the issue did well, given its huge size.

"It's normal that it trades down on the first day with all that supply," he observed.

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

During the session, Indonesian paper, throughout the curve, lost ground. The bond due 2014 lost a quarter of a point to 97 1/8 bid while the bond due 2015 fell a quarter of a point to 98½ bid.

Also in the primary, China's Fosun International Ltd. set preliminary guidance of 8½% to 9% on its $500 million offering of seven-year notes (Ba3/BB-).

The Shanghai, China-based company is expected to price the deal early next week.

Morgan Stanley and Citigroup are joint bookrunners for the Rule 144A/Regulation S with no registration rights offering.

And a Russian corporate added to the pipeline. Renaissance Securities Trading Ltd. plans to start a roadshow next week for a $150 million offering of three-year senior unsecured bonds (//B/BB-), according to a market source.

Dresdner Kleinwort Wasserstein and Renaissance Capital are joint bookrunners for the Regulation S transaction.

Profit taking hits EM

On Wednesday, there was more economic data that showed that inflationary pressure was creeping into the U.S. economy. The Institute for Supply Management's non-manufacturing index dropped to 53.3% last September from 65% in August, the lowest reading since April 2003. Rising energy prices were blamed for putting the pinch on the service sector.

There is some concern about inflationary pressure, said the sellside source, who added that the news did not directly impact bond prices but rather is impacting market sentiment.

"Investors are trying to take profits and deflate this bubble - not know if it's going to blow.

"They just want to take profits," noted the sellside source.

The trader noted that the whole Brazilian curve was hit.

During the session, the Brazilian 9 3/8% bond due 2008 fell three-quarters of a point to 109 bid while the bond due 2015 slid 0.90 to 103 ¾ bid. And the benchmark bond due 2040 lost 0.80 to 120.85 bid.

Other losers included Mexico, Russia and Turkey. The Mexico bond due 2009 lost 0.15 to 101.70 bid while the bond due 2026 dropped a point to 159 bid. The Russia bond due 2020 fell half a point to 113¾ bid. The Turkish bond due 2030 fell three-quarters of a point to 148 bid.

Ecuador surfaced as the winner of the session on an upgrade by Merrill Lynch to overweight. At session's end, the Ecuador bond due 2012 gained one point to 101 bid while the bond due 2030 added one point to 93 bid.

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