Market higher on U.S. outlook; Orascom issues $750 million; EM sees $94.84 million inflow

By Reshmi Basu, Paul Deckelman and Paul A. Harris

New York, Feb. 1 - Emerging market debt continued to strum higher Thursday as spreads pierced another historical low in response to economic data that reinforced the sentiment that inflation is moderating.

In primary news, Egypt's Orascom Telecom Finance SCA sold a $750 million upsized offering of seven-year senior notes (B2/B-) at par to yield 7 7/8%.

The deal, increased from $500 million, came at the tighter end of revised guidance, which was lowered to 7 7/8% to 8% from the 8¼% area.

Credit Suisse and Citigroup were joint bookrunners for the Rule 144A for life and Regulation S transaction

The notes, with three years of protection, will be callable in 2010 at 107 7/8.

The issue is guaranteed by Orascom Telecom Holding SAE, a wireless telecommunications provider to the Middle East, headquartered in Cairo, Egypt.

Muted inflows into EM

In other news, robust inflows into the market have been credited for maintaining the market's recent resilience. But this week inflows into dedicated emerging market funds dwindled as compared to last week. For the week ending Jan. 31, the asset class saw $94.84 million in inflows, compared to last week's $275.813 million, reported EmergingPortfolio.com Fund Research.

Furthermore for the month of January, the JP Morgan EMBI Global index posted losses of 0.3% while spreads widened by three basis points.

Gains on U.S. inflation outlook

Overall, emerging market debt turned in a solid session Thursday, as economic data suggested moderating inflation as well as a soft landing for the U.S. economy, building upon the momentum set by the Federal Reserve's decision Wednesday to hold rates steady at 5.25%.

The core U.S. personal consumption expenditures price index increased 0.1% in December, coming in below forecasts. That helped ease worries that inflation was picking up.

In the previous session, investors appeared pleased that the statement accompanying the Fed's decision suggested that the central bank was somewhat less worried about inflation while more enthusiastic about the growth of the U.S. economy.

Higher oil prices, advances in U.S. equities and a rally in U.S. Treasuries gave the market even more confidence Wednesday.

And that momentum carried into Thursday's session, as the "carry trade does not appear to be going anywhere," remarked an analyst.

With investors becoming more comfortable with the Fed scenario, prices were higher across the emerging market debt spectrum.

Among major benchmark names, the bellwether Brazilian bond due 2040 added 0.40 to 131.95 bid, 132 offered. The Argentine discount bond due 3033 rose 1.40 to 115.50 bid, 116.50 offered. The Russian bond due 2030 moved up 0.31 to 94 bid, 95 offered.

Ecuador also gained as it appears that the finance minister Ricardo Patino has softened his stance on debt restructuring. In trading, the Ecuadorian bond due 2030 added 2 points to 79.50 bid, 81 offered.

Latin America well bid

A trader in Latin American issues said that his market had "a better tone today [Thursday]," basking in the warm afterglow of Wednesday's announcement by the U.S. Federal Reserve.

That sparked a rally Wednesday in U.S. equities and Treasuries, which continued to hearten emerging market debt investors on Thursday.

"Most credits were tighter," the trader said. "Spreads were probably tighter by 5 to 10 basis points. There was pretty good momentum from yesterday's [Wednesday's], close, that carried through to today [Thursday]."

He noted that most of the EM currency markets were also stronger, "with a lot better tone in those. Equity markets globally rallied, so since [Wednesday's] Fed meeting statement, we've had a pretty good rally."

He saw no particular credits standing out, instead opining that "most credits did what they needed to do, considering where they were [before the Fed announcement]. The higher yielding credits probably rallied a little more than the better credits, but they were probably in line with each other - which they do usually."

Asia stays firm

Meanwhile trading in Asia Thursday turned in a lackluster performance, despite a market friendly environment on the Fed's decision and rebounding equity markets in the region, noted a source.

The source said the Philippines curve was unchanged from Wednesday's close of the New York session.

During intraday trading, the country saw its curve jump by as much as 3/8 to ½ point, but those gains were erased by the time London opened on the back of profit-taking.

Indonesia, on the other hand, saw better bids, spurred by local buyers.

By the time the New York session rolled around, the Asian market remained firm, enjoying the day-after continuation of Wednesday's strength, although some profit-taking curbed those gains.

Among the widely followed sovereign names, the Philippine bonds due 2032 were seen having gotten as good as 97.625 bid, up 1½ points, before coming down from that peak to end up a point at 97.125.

Its 2031 bonds were also seen firmer at 112.125, though off the day's peak of 112.375.

The five-year CDS contract on Philippine bonds tightened to 118/120 bps, narrowing by a basis point or two.

Among other names, Indonesia's bonds due in 2035 were seen up ½ point at 122.25.

In South Korean issues, that country's five-year bond's yield came in by 4 bps to 4.99%.

A trader said that the midweek announcement by Standard & Poor's raising India's debt ratings to investment-grade, while widely expected, "certainly was very positive," for that country's bonds, from both a fundamental and a technical perspective."

He noted the fact that it now "puts all three ratings agencies in line with one another, with S&P now rating India as investment grade," along with Moody's Investors Service and Fitch Ratings, which already had the South Asian country there.

Upping the ratings, he continued, "is certainly going to open up the investor base" to now include high-grade investors in the United States who could only touch the paper if it were rated at least 3 Bs by both Moody's and S&P.

When the ratings upgrade was announced, he said, "the market [during the Asian day] before the news was very weak following a weak U.S. session, with cash bids anywhere from 3 to 5 bps wider." But then the news hit the tape, and [Indian paper] "immediately traded firmer by 7 to 10 basis points to finish that trading session about 3 to 5 [bps] tighter."

The following day in Asia, Indian paper was quieter, but pretty much held on to the gains it had notched the session before.

The trader pointed out that "India is one of those names that is not as liquid in the U.S. as it is in Asia, so the amount of flows [in the U.S.] were lower than seen overnight - but the market did continue to firm up in the U.S. by a couple of basis points."

Heading towards the end of the week, he said, Indian paper "still has a fairly strong tone to it."

"The amount of people who are now looking at India, and especially the banks in the Indian sector" in light of the ratings upgrade "has grown pretty substantially."

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