Emerging market debt trades flat ahead of Hurricane Rita; two Russian banks sell $600 million in bonds

By Reshmi Basu and Paul A. Harris

New York, Sept. 23 - Emerging market debt showed little movement Friday as investors chose not to add risk until the full effects of Hurricane Rita are known.

"The market became less jittery when the storm was downgraded," said a trader. "But no one was in a buying mood leading into the weekend," he added.

For the most part, emerging markets took its cue from U.S. Treasuries, which ended the session lower as Hurricane Rita was downgraded to a category 3 hurricane.

The yield on the 10-year note stood at 4.24% from 4.18% late Thursday.

Oil prices also eased as damage to refinery capacity in the Gulf of Mexico may turn out to be less severe than originally thought.

"But the market is taking no chances until the Hurricane is over," said the trader.

Nonetheless, the market continues to be very positive," noted Enrique Alvarez, Latin America debt strategist for IDEAglobal.

"All global markets are at the mercy at what happens over the weekend with the hurricane."

However, with the storm losing strength, the market may turn its focus back to speculation on monetary policy in the United States and surmising whether or not there will be a pause in rate hikes.

During the session, the Brazil bond due 2040 was up 0.10 to 121 bid. The Colombia bond due 2033 gained 0.15 to 129 bid. The Venezuela bond due 2029 slipped 0.30 to 115½ bid.

Colombia and Venezuela stand out

In the last few weeks, Colombia and Venezuela have surfaced as the out-performers from the Latin American region.

Venezuelan bonds have seen a surge in response to high oil prices and rumors of a bond buyback related to its 2006 budget, said Alvarez.

Colombian bonds moved higher on its recent bond buyback.

"It [Colombia] changed its external debt profile, but didn't change things domestically," remarked Alvarez.

"For all the noise Colombia made and the huge rise [in bonds], it remains to be seen how they will shift gears and get reforms back on track locally."

Last Wednesday, Argentina cancelled its auction of Boden bonds due 2015, saying that yields demanded by investors were too high. The average bid was 8.8%.

"It is a negative in the medium to long-term for Argentina because obviously there is still a lot of resistance on the part of investors to take outright Argentine risk based in dollars at very low levels," observed Alvarez.

"So for all the risk appetite that is out there, there still is some caution when it comes to Argentina," he added.

Moving ahead, one analyst said the market has a positive tone heading into October, given strong inflows into the market. But most of those flows are heading into local markets, remarked the source.

In addition, expected pre-financing and large amortization and coupon payments coming due will add support to the market.

Two Russian banks price

In Friday's primary market, two Russians banks priced deals. Promsvyazbank brought an upsized offering of $200 million in five-year notes (B1/B/B) at par to yield 8½%.

The issue was increased from $150 million.

Citigroup ran the Regulation S transaction.

And Industry & Construction Bank priced a $400 million issue of 10-year subordinated lower tier II eurobonds (Ba2//B) at par to yield 6.2%.

The yield came inside of the 6 3/8% area price guidance.

ABN Amro and Deutsche Bank Securities were bookrunners for the Regulation S issue.

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