Emerging market debt steady despite declining U.S core markets; ICICI Bank to sell dollar bonds

By Reshmi Basu and Paul A. Harris

New York, Aug. 11 - Emerging market debt demonstrated resilience Friday as U.S. equities and Treasuries fell on renewed concerns that the Federal Reserve may raise fund rates at its upcoming meeting in September.

On the primary front, India's ICICI Bank Ltd. plans to sell a dollar-denominated offering of perpetual hybrid tier 1 bonds (Baa2 expected) via Merrill Lynch, JP Morgan and Morgan Stanley.

Inflationary concerns reared their head Friday on the back of stronger than expected retail numbers in the United States. The Commerce Department reported that retail sales jumped 1.4% last month on higher gasoline prices while retail sales, excluding autos, rose 1%. Both sets of numbers surpassed market forecasts and revived speculation that the central bank will push up the fed funds target rate, following last Tuesday's decision to pause after 17 consecutive rate hikes.

But then that report was contradicted by another release showing a larger-than-expected increase in business inventories, which returned the focus to the U.S. slowdown story. With mixed messages, the market remains uneasy as to the health of the U.S. economy.

"The end of the [monetary cycle] looked in sight," said a trader. "But now the market is not so sure about that," he added.

And that consternation created an unhappy trading session throughout broad financial markets.

U.S equities ticked down as the Dow Jones Industrial Average index fell 36.26 points to close at 11,088.11. U.S. Treasuries saw the yield on the 10-year note jump up by four basis points to 4.97%.

Still emerging market debt was only a tad lower on the day.

During the session, the Brazilian bond due 2040 lost 0.35 to end at 129.35 bid, 129.40 offered. The Argentinean discount bond due 2033 was down 0.05 to 96.75 bid, 97 offered. The Ecuadorian bond due 2030 was unchanged at 101.75 bid, 102.25 offered. And the Venezuelan bond due 2027 gave up 0.10 to 123.35 bid, 123.65 offered.

Nonetheless, emerging markets have been resilient in the face of softer U.S. equities. In the last week, spreads have tightened by about 10 basis points, creeping closer and closer to all-time tights, according to an analyst report

Decreased volatility and low positions are pushing investors to put cash back to work, noted the report.

Mexico firmer

Elsewhere, Mexico saw a limited upside from the local financing Thursday of the previously announced higher then expected debt payment to multilaterals. The government said on June 22 it would pay $9 billion, which is $2 billion more than the original announced amount.

In order to fund the purchase of dollars and make the expected payments, the federal government held a special auction on Thursday, where it sold Ps. 135 billion of new floating-rate instruments.

The new Bondes D carry maturities of one, two, three, four, and five years and replace an issuance of several floating-rate bonds known as Brems.

According to a market source, the local debt swap has minimal impact on the Bono market, but more importantly reduces the country's external debt.

During the session, the Mexico bond due 2009 edged down 0.05 to 111.10 bid, 111.35 offered while the bond due 2026 gained 1.75 to 156 bid, 157 offered. The bond due 2033 was up 0.80 to 113.40 bid, 113.85 offered.

CVRD down on long-end

In other news, Brazilian mining company Companhia Vale do Rio Doce (CVRD) saw its long maturity issues head lower after it said it intends to make an all-cash offer of C$86 per share for all of the outstanding common shares of Canadian nickel company Inco Ltd.

CVRD saw pressure across the long end of its debt curve. During the session, the CVRD bond due 2013 was unchanged at 101.25 bid, 102 offered while the bond due 2034 lost 1.88 to 113.88 bid. 114.63 offered.

Standard & Poor's placed its BBB+ long-term corporate credit rating on CVRD on CreditWatch with negative implications.

The ratings agency said that the CreditWatch indicates that it would likely lower the ratings on CVRD if the acquisition is completed, "potentially by more than one notch, due to increased financial leverage."

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