Emerging market debt rallies despite Treasuries sell off; primary activity picks up

By Reshmi Basu and Paul A. Harris

New York, Sept. 5 - Emerging market debt saw support Tuesday despite a sell-off in U.S. Treasuries. Meanwhile the primary market turned up the heat as several issuers are banking on an increased appetite for risk.

On Tuesday, U.S. Treasuries saw a sharp bout of profit taking, but not even that could prevent emerging markets from zooming ahead as the summer lull appears to be put to bed, according to market sources.

Overall, the asset class posted impressive numbers, according to sources.

At session's end, the JP Morgan EMBI Global index rose 0.14% while its spread tightened by eight basis points to 190 basis points versus Treasuries.

Turkey helped jump-start the session with the release of muted inflation data. And that set the mood for a rally across the asset class.

During the session, Turkey's component of the EMBI Global index tightened by 10 basis points. In trading, the Turkish bond due 2030 rose 1.25 to 150 bid, 150.50 offered.

Tuesday also saw positive but unsurprising news from Mexico.

The country's electoral tribunal gave its final ruling on the disputed July 2 presidential election, declaring market favorite Felipe Calderon of the National Action Party (PAN) as president over leftist Lopez Obrador.

Despite the news, Mexico's bonds were weaker on profit taking after the announcement, according to a trader, who added that the decision had already been priced in.

"We have no major concerns regarding the fundamental state of the Mexican economy," wrote Alberto Bernal, fixed income analyst for Bear Stearns & Co. Inc., in a research note.

Bernal also noted that the economy is growing soundly as the latest round of economic numbers hint that growth will exceed 4% year-over-year this year, that is if the economy does not stall because of political weakness.

"On the less positive side, despite the good likelihood that Calderon will govern the country in the next six years, and despite the good showing of the PAN in the Congress (will control 40% of the seats in the Senate and 41% of the Lower House), we still have material question marks regarding the future of the reform process," he added.

During the session, the Mexico bond due 2033 lost 0.20 to 115.65 bid, 116.30 offered.

Elsewhere, Brazilian bonds gathered momentum on the government's announcement Monday that it would widen the scope of its buyback program to also include the bonds due 2012, according to a market source.

In trading, the bellwether Brazilian bond due 2040 added 0.25 to 130.90 bid, 130.95 offered.

And in a surprising move Monday, Standard & Poor's upped Russia's sovereign credit one notch to BBB+, citing Russia's "astute fiscal management."

The country saw its portion of the EMBI Global index come in by six basis points.

Primary issuance gains speed

As year-end emerges as the next milestone on the calendar, the corporate pipeline is gathering speed.

From Latin America, Brazil's Banco Votorantim will begin a roadshow Wednesday for a $200 million offering of 10-year notes (Ba2/BB/BB+) via Citigroup and BNP Paribas.

Chile's Compania de Acero del Pacifico (CAP) plans to issue $200 million in 30-year bullet notes (/BBB-/BBB-).

Citigroup and HSBC are bookrunners for the Rule 144A/Regulation S transaction.

The issuer is a state-owned corporation that operates the nation's largest iron mines.

And Venezuela's multilateral regional bank Corporacion Andina de Fomento (CAF) plans to sell a $200 million offering of 10-year bonds (A1/A/A+).

Credit Suisse is the lead manager for the bonds, which are registered with the Securities and Exchange Commission.

Over to Russia and the CIS region, Alliance Bank JSC Kazakhstan plans to start a roadshow this week for a dollar-denominated offering of seven-year eurobonds (Ba2//BB-).

Credit Suisse and JP Morgan are running the Rule 144A/Regulation S transaction.

Also out of Kazakhstan. Bank TuranAlem will begin a roadshow next Tuesday in Frankfurt and Munich for its euro-denominated offering of five-year senior notes (Baa1/BB/BB+).

This is the inaugural euro-denominated transaction off the bank's $3 billion global medium-term note program.

ABN Amro and Dresdner are joint bookrunners for the Regulation S offering.

Over to Russia, state-owned OJSC Russian Agricultural Bank (RAB) (Baa2/BBB+) has mandated Barclays Capital and HSBC to lead manage a dollar-denominated offering of 10-year subordinated bonds.

An investor roadshow will be simultaneously held in Asia and Europe, commencing on Sept. 11. Pricing is expected to take place afterwards.

Thus far this year, the Russia and CIS emerging region has seen $18.75 billion in new paper, according to an analyst. Estimates are that by year-end that number will be around $28 billion.

Out of China, Agile Property Holdings Ltd. will begin a roadshow Wednesday in Hong Kong for its $350 million offering of seven-year senior notes (Ba3/BB).

Morgan Stanley and HSBC are joint bookrunners for the Rule 144A/Regulation S notes which will come with four years of call protection.

The issuer is a property developer in the Pearl River Delta region in China

And the Republic of the Fiji Islands (Ba2/BB-) set price talk for a $150 million debut offering of five-year bonds in the area of 7¼% area.

JP Morgan is the bookrunner for Regulation S transaction.

According to an investor note, the deal is only for aggressive clients. Although Fiji has low external debt, there are several negatives working against it such as prior political instability, weakening of its domestic sugar industry and relatively high government debt levels.

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