Emerging market debt stays afloat despite Fed's hawkish tone; Jamaica sells $250 million 20-year bonds

By Reshmi Basu and Paul A. Harris

New York, Oct. 11 - Emerging market debt took on a defensive tone Tuesday in response to the minutes from the Federal Reserve's last monetary policy meeting, which reiterated the central bank's focus on inflationary pressure in the U.S economy.

In the primary market, the government of Jamaica priced $250 million of 20-year global bonds (B1/B) at 98.881 to yield 9 3/8% in a drive-by Tuesday via Morgan Stanley.

Also Kazakhstan's Bank Caspian priced a $150 million debut offering of three-year bonds (Ba2//B+ expected) at 99.672 to yield 8%.

Citigroup was the lead manager for the Regulation S transaction.

Also in primary news from Kazakhstan, ATF Bank plans to issue an offering of dollar-denominated five-year eurobonds via Deutsche Bank and HSBC.

From Russia, AK Bars Bank revised price talk on its $150 million three-year senior loan participation notes to a yield in the 8% area from 7¾% to 8% on Tuesday.

The offering is expected to price before the end of the week.

Deutsche Bank Securities has the books for the Regulation S-only offering.

Turning to the Ukraine, the City of Kiev plans to start a roadshow for a $250 million offering of 10-year notes (B2/B+) this week.

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

And Nadra Bank of Ukraine plans to start a European roadshow for short-dated eurobond during the week of Oct. 17.

Dresdner Kleinwort Wasserstein and UBS Investment Bank have been mandated to manage the roadshow.

Fed sees inflation risks

The Federal Open Market Committee's minutes insinuated that the Federal Reserve is nowhere finished with completing its current monetary tightening campaign.

"Although uncertainty has increased, in the FOMC's judgment the fundamental factors influencing the longer-term path of the economy probably had not been affected by the hurricane, but the upside risks to inflation appeared to have increased," according to a statement regarding the Sept. 20 meeting.

In response to the statement, U.S. Treasuries ended down. The yield on the 10-year note jumped to 4.39% from Friday's close of 4.36%.

"The small backup in Treasuries has been the main driving force," said Enrique Alvarez, Latin America debt strategist for research firm IDEAglobal.

"The market was slightly defensive - nothing really extraordinary. And diverging domestic markets was one of the traits," he noted.

Alvarez said that the market is in a "wait and see" mode and will be looking closely at Friday's consumer price index release for clues about the inflationary picture in the United States.

During the session, the Brazil bond due 2040 fell 0.15 to 119¾ bid. The Russia bond due 2030 gained 0.19 to 112.93 bid. The Venezuela bond due 2027 added 0.10 to 115.70 bid.

Meanwhile Ecuador bonds blew out in response to Friday's resignation by deputy economy minister Alexis Valencia. The bond due 2030 fell 1.95 to 91 bid.

Flows keep coming

However, the market showed resilience as Treasuries stabbed 4.39%, noted market sources. That resilience was technical driven, said a market source, who credited the re-allocation of flows from the high-yield market in response to the bankruptcy filed by Delphi Corp. on Saturday.

"Everyone came in a little bit uncertain as to what was going to be the predominant factor in the market," given the continued recovery from the weakness in the yen last week, or the impact from the Delphi filing," remarked a trader who focuses on Asian names.

He said that Tuesday's session for Asian credits had been much more dictated by what was going on within emerging markets in general.

The trader added that spreads have a tendency to follow the high-grade market and were marginally wider, but not by that much.

For instance, some of the Asian benchmark names were only one or two basis points wider. In areas such as Japanese bank capital, he said there were accounts coming in, looking to buy weakness in the morning, or looking for any market-related widening to buy.

Meanwhile, high beta names such as Indonesia and the Philippines have been more impacted by the goings ons in emerging markets, he said, adding that Indonesia has outperformed.

"We've seen better buying again during the last couple of sessions," he remarked.

Philippines has been up, and drifted off somewhat Tuesday, with more selling from U.S. and European accounts, he observed.

"But even there we're a good 10 points tighter off the wides last Thursday."

Indonesia's new deal trading well

Last Wednesday, the Republic of Indonesia sold an offering of $1.50 billion of sovereign bonds (B2/B+/BB-) in two tranches Wednesday.

The country sold $900 million of bonds due Jan. 2016 at 99.139 to yield 7 5/8% while the portion of $600 million of bonds due Oct. 2035 priced at 98.666 to yield 8 5/8%.

The deal has been performing well in the secondary, noted the trader.

The issues' first full trading day happened to coincide with the greatest day of volatility in the emerging markets, he commented.

"Indonesia opened very defensively until people saw how much selling there would be. It came back quickly, though, and has performed strongly since that time."

He added that there was a bit of pressure on the Indonesian bonds due 2015 when price talk first surfaced for the new 2016 bonds, but he observed that there was very little follow-through selling.

"It has kind of just fit in along the curve - about 20 to 25 [basis points] tight to the 2016s."

During Tuesday's session, he spotted the Indonesian bond due 2015 at 99 bid and the bond due 2016 at 99½ bid.

The 2016s were trading basically flat to where they came in yield, but five basis points tighter in terms of spread, he observed. The 2015 bonds are five wider.

In a difficult market Indonesia saw $4.5 billion in demand, and it has performed very well, "...especially when compared to previous Indonesia deals which have been a mess," he told Prospect News.

In terms of new deals, the market is more discerning than earlier in the year.

Still, the right deals will find buyers, he said.

"Right now they're trying to bring some aggressive high-yield issues, the latest one from a Chinese conglomerate called Fosun International." similar to G Steel PCL which came about 10 days ago, and it is "difficult right now, given what's going on in the high-yield market," he commented.

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