Emerging market debt turns down on sharp Treasuries fall; Indonesia sells $2 billion; $667 million inflows

By Reshmi Basu and Paul A. Harris

New York, March 2 - Emerging market debt eased Thursday as U.S. Treasuries skidded after the European Central Bank signaled that more rate increases lie ahead due to inflationary pressures.

In other news, flows into the emerging markets asset class continue to be strong. Dedicated funds saw inflows of $667 million for the week ending March 1, according to EmergingPortfolio.com Fund Research.

Year-to-date flows into the market stand at $3.712 billion.

In the primary market, Indonesia (B2/B+) sold $2 billion of sovereign bonds in a dual tranche offering.

The deal was comprised of $1 billion in bonds due 2017 as well as $1 billion in a retap of its bonds due 2035.

The 2017 piece priced at 99.052 to yield 6 7/8%. The reopened 2035 bonds priced at 113.454 to yield a spread of 263.8 basis points more than Treasuries.

Barclays Capital, JP Morgan and UBS Investment Bank were lead managers for the Rule 144A/Regulation S offering.

The new sovereign issue ended the session right around where it priced, according to a trader who focuses on high-yielding Asian debt.

Near the close of the session, the 2017 retap was spotted down 0.68 to 113.70 bid, 113.75 offered.

The trader added that the deal would have done fine if not for the U.S Treasury market tank.

"Treasuries fell a point on the day and took all of the juice out of the deal," he said.

Furthermore the deal was three-times oversubscribed, but investors began to pull out of the deal when the market started to fall.

"If Treasuries hadn't fallen like a stone, the deal would have done a lot better. But considering how bad the market felt, and how they got away with pricing this thing, it should probably be considered a success," he added.

Also in primary news, Korea's largest overseas borrower Korea Development Bank sold a €500 million of offering of five-year floating-rate notes (A3/A/A+) at par to yield three-month Euribor plus 20 basis points.

ABN Amro, Barclays Capital, and Citigroup were joint bookrunners for the Regulation S transaction.

EM hurt by Treasuries

A rout in U.S. Treasuries pressured emerging markets Thursday. U.S. government bonds hit a four-month high after the European Central Bank raised its benchmark rate to 2.50% from 2.25%. The central bank also signaled that more rate hikes are likely for Europe, which created fears that the sentiment would spill over into the United States.

Emerging market investors appeared uncomfortable as Treasury yields marked a new trading ranged. Yields jumped out to the 4.65% to 4.66% range, which made Latin American investors nervous, remarked Enrique Alvarez, Latin America debt strategist for research firm IDEAglobal.

By the end of trading, the 10-year Treasury note stood at 4.64%, higher than Wednesday's 4.59% close.

At late session, the Brazilian bond due 2040 had eased 0.75 to 105.65 bid, 106.10 offered.

Even the unstoppable Argentina discount bond due 2033 was finally stopped, noted another trader. Late in the session, the bond was seen at 100.60 bid, 100.75 offered, down half a point.

The Colombia bond due 2012 was quoted at 121.30 bid, 121.80 offered, down 0.20.

"The market seems spooked by the hawkish Europeans," observed the trader, adding that investors' focus returned to the Federal Reserve.

Over to Asia, the first trader quoted above said that continuing political troubles have not impacted the Philippines.

"If you can't handle political risk, buy Walmart at 250 inside," he said.

In late session, the Philippine bond due 2025 was spotted down 0.19 to 129.25 bid, 129.37 offered.

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