Emerging market debt trades lower on U.S. Treasuries; Pakistan adds 30-year tranche

By Reshmi Basu and Paul A. Harris

New York, March 21- Emerging market debt was heavy Tuesday on the back of weak U.S. Treasuries.

In the primary market, the Islamic Republic of Pakistan added a 30-year tranche to its dollar-denominated offering of fixed-rate bonds (B2/B+).

The issuance, which will not exceed $1.5 billion, will now include 10-year bonds and 30-year bonds.

Price guidance for the 10-year tranche has been set in the area of 7 1/8% while the 30-year tranche is being talked at 62.5 to 75 basis points over the yield on the 10-year tranche.

Citigroup, Deutsche Bank and JP Morgan are the bookrunners for the transaction.

One buyside source said the new issue would make a good "diversifier".

"I don't think the yield is that bad and as a diversifier, it probably makes sense," noted the source.

Pricing is expected at the end of the week.

During the session, the Pakistan bond due 2009 eased 0.13 to 100.625 bid, 101.375 offered.

Also, the Republic of Argentina plans to issue a dollar-denominated offering of "Bonar V" bonds due March 28, 2011 (//B-) to be issued under Argentine law, according to information provided by Argentina's Public Credit as well as by market sources.

The bullet bond issue will carry a 7% coupon and will be payable in U.S. dollars. Foreign investors will be allowed to buy the bonds.

The country is expected to auction the first tranche of $500 million in local markets on Wednesday, according to a source. The cut off range is likely to be 7.88% to 8.11% for the yield, added the source.

Argentina said it would issue as much as $1.5 billion of the 2011 bonds.

"My initial intuition is that it seems on the expensive side," remarked the buyside source.

This is the first time Argentina is trying to sell bonds since the country nixed an auction last September.

Meanwhile, two more corporates added to the pipeline. Out of Mexico, retailer Grupo Gigante SA de CV plans to issue $250 million in 10-year senior unsecured bonds (/BB/BB) via ABN Amro.

The issue will be non-callable for five years.

And India's largest private sector company, Reliance Industries Ltd., plan to issue ¥17 billion of 10-year euroyen bonds (Baa2/BBB).

ABN Amro, Citigroup and Deutsche Bank are the bookrunners for the Regulation S transaction.

Other than Pakistan, the buyside source is not looking at any issues in the pipeline. Instead the source is looking for more of a pullback in the market before putting money to work.

EM down on Treasuries volatility

Core U.S. markets headed backed down Wednesday. Once again, the U.S. Treasuries yield curve inverted as the yield on the 2-year Treasury note ended the session higher than the yield on the 10-year Treasury note.

Mixed inflation data along with remarks by Federal Reserve chairman Ben Bernanke made for a skittish market.

U.S. producer prices fell an unexpected 1.4% in February. But the core producer price index, which excludes food and energy prices, increased 0.3%, surpassing market expectations. The PPI data and Bernanke's optimism over the U.S. economy added fuel to speculation that the Fed will continue to plow ahead with its current monetary tightening campaign. The market is wary, given that no one can pinpoint with certainty when and where the Fed will pause, noted a market source.

At session's end, the yield on the 10-year Treasury note shot up to 4.72% from 4.66% on Monday. Adding to the heavy tone in emerging markets, local equity markets were pinched by currency weakness.

As a result, emerging market debt was heavy Tuesday.

The JP Morgan EMBI Global Diversified Index fell 0.4% while spreads were unchanged at 201 basis points over Treasuries.

During the session, the Brazilian bond due 2040 lost 1.20 to 129.85 bid, 129.95 offered. The Argentinean discount bond due 2033 fell 1.50 to 99.25 bid, 99.75 offered. The Russian bond due 2030 shed 0.56 to 110.125 bid, 110.625 offered.

Peruvian bonds saw a little reprieve from the election uncertainty earlier in the session but were eventually dragged down by the overall market malaise.

The country's bond due 2033 slipped two points to 110.65 bid, 111 offered.

Moreover, the buyside source noted that market sentiment is "not as strong as we would like it to be," but cautioned that it depends on the angle from which investors view the asset class.

"If you are looking at external markets, the dollar denominated ends up holding on incredibly well, which kind of confirms the theory of strong inflows behind the asset class and a more stable pool of money," noted the source.

"More of the sell-off has come from the local markets - again in the big theme of global risk reduction and more hedge fund trading type of accounts being popped out of trades."

In other news, the Andean Development Corp. (CAF) gave $293 million in loans to Ecuador. Of that, $250 million has been earmarked for debt improvement. One source noted that part of the funds would be likely used to fund the call of the global bond due 2012.

During the session, the Ecuadorian 2012 bond was unchanged at 101.75 bid, 102.50 offered.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.