Emerging market debt rises on U.S. Treasuries news, GM news; Mandra sells $195 million notes

By Reshmi Basu and Paul A. Harris

New York, May 4 - Emerging market debt added to its gains Wednesday, buoyed by news that the U.S. Treasury may resume 30-year bond sales and renewed optimism for General Motors Corp.

Meanwhile in the primary market, Mandra Forestry Holdings Ltd. priced a downsized and restructured $195 million issue of eight-year senior notes (B1/B) with warrants at par to yield 12%.

Morgan Stanley ran the books for the Rule 144A/Regulation S offering.

And in its first capital offering since the default, the Argentine government auctioned up to 1 billion pesos of bonds maturing in 2014 in the domestic market.

Meanwhile, the South American country's government is unable to complete its debt exchange until the New York appeals court makes a ruling over a case involving a group of investors who rejected the $100 billion debt-restructuring offer in February.

Up on Treasury news

Emerging debt continued to move higher Wednesday, continuing the gains begun after Tuesday's announcement by the Federal Reserve that interest rate hikes would continue at a "measured" pace.

That set a positive tone for emerging markets going into Wednesday.

But U.S. Treasuries suffered early from economic data. The Institute for Supply Management index of services fell to 61.7 in April from 63.1 in March.

"At first, the ISM number was positive - above expectations, so that led to a fall in prices in Treasuries," said a sellside source.

Then after that, the longer dated U.S. government debt plunged after assistant secretary for financial markets Timothy Bitsberger said the Treasury might bring back the 30-year bond.

"That made the 30-year bond go to levels of 5% five seconds after that [statement], but then it stabilized at around 10 basis points up from where we were yesterday [Tuesday]," noted the sellside source.

Long Treasuries made up some of their losses by the end of the day, with the 30-year bond ending at 4.59%, up from 4½% Tuesday but improved from as high as 5.05% reached intra-day.

The yield on the 10-year note stood at 4.19% from Tuesday's close of 4.16%.

But while Treasuries declined, emerging markets gained, both absolutely and on a spread basis. Sources said that expectations of less 10-year U.S. issuance helped build on the early positive sentiment in emerging markets.

"All this movement and widening in both the 10-year and 30-year has led to a significant spread compressing in emerging markets during the day - mostly in the long end of the curves of different issuers," said the sellside source.

Long end bonds made gains during the session. The Brazil bond due 2040 gained 0.80 to 115.20 bid.

The Colombia bond due 2027 added a point to 109 ¾ bid. The Philippines bond due 2025 padded 1¾ points to 109¾ bid.

Bitsberger said the Treasury believed it had "the flexibility to issue 30-year bonds and maintain liquid issuance in all of our other securities."

"We are doing this because times have changed, and our debt portfolio has changed," said Bitsberger in Washington.

A decision will be announced on Aug. 3, he said.

GM offer helps EM

Emerging markets also gained support as billionaire investor Kirk Kerkorian made an offer to buy more stock in troubled vehicle maker General Motors that would take his stake to nearly 9%.

"You also see some rallying in emerging markets," said the sellside source. "What's happening now is that portfolios are so mixed that if you do well in one of them, you will try to invest hoping to maintain a certain benchmark.

"And news about the offer for GM shares was good for the market. Their spreads rallied and that translated to EM markets," he remarked.

Russia trades through Mexico

Spreads on Russia's sovereigns are trading tighter than Mexico's sovereigns, according to sources.

The sellside source spotted the spread on Russia's bond due 2030 at 205 basis points over Treasuries while the spread on Mexico's bond due 2031 stood at 227 basis points.

"UMS has around 18 benchmark bonds in the sovereign market," he noted. "And Russia bonds are very scarce. They said they aren't going to issue anymore until 2007/2008 at least."

That scarcity value along with excess reserves bodes well for Russia to continue to cross Mexico, he remarked. Additionally, the credit may see more improvements than Mexico in terms of reforms and economic direction.

"Mexico doesn't see any negative or positive news. It is just playing Treasuries," he commented.

An emerging market analyst said that the trend will last, at least as long as there's not a serious change of credit outlook in Russia.

"A new political crisis or a serious slump in oil prices could change things, but for now the prospect of shrinking supply of Russian external debt should keep spreads low for some time," he said,

"I don't expect to see Russia trade much tighter to Mexico than it is now, but it probably won't widen considerably any time soon."

On the political front, Mexico's attorney general's office dismissed its case against Mexico City mayor Lopez Obrador, ending an attempt to bring criminal charges against the popular mayor that could have ended his bid for president.

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