Emerging market debt grinds tighter despite Treasuries slump; Codelco sells $500 million 30-year bonds

By Reshmi Basu and Paul A. Harris

New York, Sept. 16 - Emerging market debt continued to grind tighter in trading Friday even as U.S. Treasury yields hit a one-month high.

Meanwhile in the primary market, Corporacion Nacional del Cobre de Chile (Codelco) placed $500 million of 30-year bonds (Aa3/A) at 98.167 to yield 5.754% or a spread of 118 basis points more than Treasuries.

Deutsche Bank and JP Morgan ran the Rule 144A/Regulation S transaction.

Also two Russian corporates added to the pipeline.

Russia's Promsvyazbank will begin a roadshow Monday in Singapore for its $150 million offering of loan participation notes.

Roadshow stops also include Hong Kong on Tuesday and Zurich on Wednesday.

Citigroup has the books for the Regulation S offering.

The notes are expected to be structured with either a three- or five-year maturity.

And Industry & Construction Bank plans to issue dollar-denominated 10-year notes (Ba3//B+) during the week of Sept. 19.

The issue will be structured as loan participation notes and lower Tier II notes.

The notes will also be non-callable for five-years.

ABN Amro and Deutsche Bank are running the Regulation S transaction.

EM keeps tightening

Emerging markets continued to be essentially impervious to a three-day Treasury slump, as spreads hit another record tight. Prices slipped slightly even as U.S. governments showed bigger losses.

The hunger for high-yielding paper has been behind the decoupling of emerging market debt and Treasuries in recent sessions.

"[Treasury] yields are marking a higher territory, but that's not stopping EM," noted a trader.

"Everyone wants paper," said the trader, who added that there was a lot of demand coming out of Asia.

During Friday's session, Treasuries came under attack on concerns over inflationary pressure in the U.S. economy. Additionally, Treasuries stumbled on supply fears in anticipation that the Treasury department would flood the market with U.S. bonds to meet the financing needs of the Gulf Coast reconstruction efforts.

The yield on the 10-year note stood at 4.26% by the time trading finished, up from Thursday's 4.20% close.

"There are good technicals and the market is betting that there will be a Fed pause," said an emerging markets source, who added that high-yielding paper was benefiting from that sentiment.

During Friday's session, the JP Morgan EMBI+ Index slipped 0.10% while spreads narrowed by five basis points to 258 basis points. The Brazil bond due 2040 slid 0.20 to 120.10 bid. The Russia bond due 2030 added 0.06 to 114¼ bid. The Venezuela bond due 2027 lost 0.15 to 113 bid.

"You have a persistent market that will not surrender its gains," remarked Enrique Alvarez, Latin America debt strategist for think tank IDEAglobal.

"It's just a very tight market, where everyone is guarding their high-yielding paper and just sitting on it."

With such tight levels, Alvarez said he believes the market is overdone. Furthermore he warned that some investors may be overly confident that the Federal Reserve will pause its current monetary tightening campaign on economic weakness in the United States. But he added that supporters of that theory were not taking into account inflationary pressure or the steepening of the U.S. Treasury curve.

"I think the basic fact is that even though Treasury yields are moving higher, they're still very low, especially in real terms, which means that liquidity conditions remain supportive," said an emerging market analyst.

"All the other factors - high commodities prices, limited sovereign new issuance, and the cyclical strength in a lot of EM economies - only add fuel to the fire.

"That's not to say that EM spreads are fairly values, they're not, but in the short term the technicals and external liquidity conditions should continue to support the market," he added.

Nonetheless, Alvarez cautioned that the market is at an overdone point.

"People are ignoring inflationary concerns in the U.S.," he remarked.

"People are ignoring domestic politics and uneasiness in Brazil. They are just very much focused and convinced that continued flows into the category, that global liquidity into the category will continue to pump up prices.

"Essentially, it's turned into a very over-extended yield hunt."

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