Emerging market debt stabilizes as Treasuries recover; Asian corporates bring new deals

By Reshmi Basu and Paul A. Harris

New York, March 10 - Emerging market debt stabilized Thursday after being smacked by a plunge in U.S Treasuries the day before.

"We had a better performance in Treasuries today [Thursday] and that's definitely given support to prices in the region," said a Latin America debt strategist for Refco EM.

Inflation concerns eased up as oil prices backed down to $53 a barrel from above $55 a barrel on Wednesday.

"Earlier in the day Treasuries were pretty volatile, but in general it's ending up decent at the end of the day," said a sellside source.

The yield on the 10-year note stood at 4.46% by the close, down from 4.53% on Wednesday, the highest level since last July.

The Treasuries turnaround helped steady emerging market debt. The Brazil bond due 2040 added 0.10 to 116.30 bid. The Ecuador bond due 2030 fell ¾ point to 95½ bid. The Mexico bond due 2009 slid 0.40 to 119½ bid.

Whenever U.S. Treasuries are hit, it is normal for Latin American debt to be bruised - as investors have witnessed in the past years, according to the Refco strategist.

"Emerging market bonds are highly correlated to Treasuries due to the structure of the debt in the region," he explained.

"And we should expect that as interest rates keep on moving higher, we should expect some volatility."

Over the past year, Treasuries have shown resilience even as the Federal Reserve has actively increased short-term interest rates, noted the strategist.

"Emerging markets benefited from that. We're going to see volatility and pressure on the way down. But I think it's temporary and it shouldn't indicate a major correction in the market."

Asian corporates come to market

In the primary market Thursday, Titan Petrochemicals Group Ltd. priced a $400 million issue of seven-year senior unsecured notes (B1/B+) at par to yield 8½%.

Morgan Stanley ran the books for the Rule 144A/Regulation S issue. Credit Suisse First Boston was the co-manager.

Noble Group Ltd. priced an upsized $700 million 10-year notes (Ba1/BB+) at 99.059 or a spread of Treasuries plus 225 basis points via JP Morgan.

And ChinaTrust Commercial Bank of Taiwan priced an upsized $500 million of perpetual bonds at 99.118 for a spread of 128 basis points over the Treasury due February 2015. JP Morgan was bookrunner.

Asian paper was softer from the new supply, according to the sellside source. Nonetheless, in the secondary, Noble's new deal tightened by two basis points.

"The higher yielding Asian bonds traded off overnight," said the source.

"We figured that we would see some softness, with dealers coming out of Noble because it was so tightly priced. But it has held in well, and has traded as tight as 223 basis points.

"The comps for ChinaTrust all widened out overnight with the Treasury move. But no one blinked on ChinaTrust and it has just gone tighter."

In secondary activity a trader saw Titan Petrochemicals' new 8½% notes due 2012 "not doing too well," having broken at 100.75, up from their par issue price, before dropping back to 99.875 bid, 100.375 offered. However a source at another desk said late in the session that their shop had seen the bonds still above par.

Noble Group's new 6 5/8% notes due 2015, which priced at a discount to par (99.059), were seen going home at 99 bid, 99.5 offered.

Carry trade winds down

In an environment of higher interest rates, the carry trade is winding down compared to last year, according to the Refco strategist.

He noted that the carry trade has another component, which is the leverage trade.

"When you start seeing the returns of some of these investments decrease, you would tend to leverage a position, and take advantage of the higher face value.

"The problem that we are seeing is that increasing interest rates will tend to negatively impact a leverage position," he remarked.

The carry trade is still appealing because there are not many options in the fixed-income world where you get the type of returns found in emerging markets, he added.

But, he noted: "It's not with the same strength that we saw last year during this time."

Venezuela deal rumors

Rumors still persist that Venezuela is planning a dollar deal.

"I wouldn't be surprised that they come to market," said the strategist. "Here you have an environment that favors oil-export countries."

He added that Venezuela has been very timely in coming to market when oil prices are on the way up.

"People tend to underplay the political risk and tend to overplay the price of oil."

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