Emerging market debt tone positive but cautious; $1.86 billion of new paper issued

By Reshmi Basu and Paul A. Harris

New York, April 13 - Emerging market sentiment remained intact even as U.S. Treasuries were mixed in response to weak U.S. retail numbers offset by a poor note auction.

Meanwhile, the primary market woke up as $1.860 billion of new paper was issued during Wednesday's session.

The tone in emerging markets was positive but more cautious as it still finds comfort in the minutes from the Federal Open Market Committee meeting, released Tuesday, said a source.

But Treasuries erased most of their early gains Wednesday. Treasury yields had compressed on weaker-than-expected U.S. retail numbers. The Commerce Department reported that sales increased by only 0.3% in March, suggesting that rising fuel costs are weighing on consumers' minds. That news sent the yield on the 10-year note to 4.33%, a one-month low.

But then Treasuries fell on a weak auction of $15 billion of five-year notes. The percentage of indirect bidders, which includes foreign central banks, fell to 28% from 43% at the most recent five-year bond auction.

The yield on the 10-year note stood at 4.37% by the time trading wrapped up for the day, virtually unchanged from Tuesday's close.

In emerging markets, Brazil rose. The C-bond was up 1/8 of a point to 100 bid while the bond due 2040 was up 0.050 to 114.30 bid.

EM outperforming junk, worries investor

While stability appears to have returned to emerging markets, the high-yield asset class continues to stagger, a concern for one buyside source.

"In general, EM is trading okay," he said.

"EM has outperformed so much in the last week or so - even as high yield has gotten destroyed. And it's just not autos. It's a little bit of everything."

He added that the sectors normally do not trade this far apart from each other.

The source noted that he is looking for more of a correction in Latin America and government bonds.

Sovereign, two corporates price

During Wednesday's session, $1.860 billion of new emerging markets paper was issued as a sovereign and two corporates came to market.

Early in the session, the Republic of Indonesia priced $1 billion of 10-year bonds (B2/B+/BB-) at 99.127 to yield 7 3/8%. This is the country's second bond offering since the financial crisis of 1997-1998.

"Indonesia will generate some interest as a diversification play, and it will find solid demand from regional investors, who have pushed down Indonesian spreads simply because of their regional proximity," said an emerging market analyst.

"Relative to its single-B peers, though, this new Indonesia deal is still very expensive. Brazil, which is rated a full notch higher than Indonesia, offers about 100 bp of additional spread in the 10Y sector, and Venezuela offers about 125 bp extra."

The analyst said that while Indonesia may be to some degree an improving credit, its outlook is not so much better than Brazil or Venezuela that it warrants lower spreads.

"Investors are paying a hefty premium for diversification or regional proximity, and I expect investors who aren't interested in those factors will steer clear of this deal," he remarked.

The buyside source agreed, choosing not to play because of the high risk and the low yield.

"Seven and change doesn't really do it for me," he said. "The market has gotten beat up. Indonesia is still a risky place.

"I rather buy a good BB Asian name at 7½% than Indonesia - like a Hanaro Telecom or a Noble Group or something like that."

Indonesia's new 7¼% bond due 2015 traded down in the secondary to 98¾ bid, 99 1/8 offered.

Indonesia postponed the offering last month due to market volatility, stemming from a flight to quality in the credit market on fears of a potential ratings downgrade for General Motors Corp.

Citigroup, Deutsche Bank and UBS AG were the bookrunners for the Rule 144A/Regulation S.

But the buyside source did play in Grupo Transportación Ferroviaria Mexicana's (TFM) restructured $460 million issue of seven-year senior notes (B2/B+).

The deal priced at par to yield 9 3/8%.

"I've owned the company for a long time," said the buyside source.

He added that buying into TFM is tantamount to buying Kansas City Southern Railway, which owns a controlling interest in TFM.

"If these guys ever needed money, they can get it from Kansas City. I think there's a lot of room for business improvement at the margin," he remarked. "It's a good asset."

In the secondary, TFM's new 9 3/8% bonds due 2012 were seen at 100½ bid, 101 offered, up from their par issue price.

Morgan Stanley ran the books for the Rule 144A with registration rights notes. Scotia Capital was the co-manager.

Also, Celulosa Arauco y Constitucion SA priced an upsized $400 million of 10-year bonds (Baa2/BBB+/BBB+) at 99.525 at a spread of Treasuries plus 132 basis points.

JP Morgan was the sole bookrunner for the Rule 144A/Regulation S (with registration rights) offering.

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