Emerging market debt lower; Shanghai Real Estate sells upsized $200 million in bonds

By Reshmi Basu and Paul A. Harris

New York, April 10 - Emerging market debt moved lower Monday as yields on the 10-year U.S. Treasury note continued to ascend towards 5%.

In the primary market, property developer Shanghai Real Estate Ltd. sold an upsized offering of $200 million in seven-year bonds (expected Ba3/BB-) at par to yield 8 5/8% via Deutsche Bank and Morgan Stanley.

And TuranAlem Finance BV, a financing subsidiary of Kazakhstan's JSC Bank TuranAlem, has given price guidance of 8% area on its anticipated benchmark-sized offering of seven-year eurobonds (Baa2/BB/BB+).

The offering is expected to price this week.

ING and JP Morgan are the lead managers.

EM lower

Emerging market debt nudged lower Monday following Friday's sharp decline on the back of a heavy sell-off in U.S. Treasuries.

Monday's session saw the U.S. government 10-year note close at 4.96%, but not before nearing the psychological 5% threshold.

For the most part, emerging market debt traded in narrow ranges, as investors were reluctant to add more risk on the possibility that Treasuries may see another rout, noted a trader.

During the session, the Brazilian bond due 2040 lost 0.35 to 126.90 bid, 127 offered. The Colombian bond due 2033 erased one point to 135.75 bid, 136.75 offered. The Russian bond due 2030 gave up 0.19 to 108 bid, 108.25 offered.

The yield on the 10-year note is climbing towards 5% on the expectation that the Federal Reserve will boost federal funds to 5% at its next meeting in May.

"I don't just don't think this market has momentum right now, so the likelihood of getting back to 4.80% is lower than seeing a 5% handle on the 10-year," replied a buyside source, but she added that it appears unlikely that the yield will pierce 5.50%.

"The carry trade is still there for the local markets where the carry is still high like Brazil and Turkey. You have a lot of cushion there for a sell-off, so I don't necessarily see why these countries shouldn't do well," she added.

Nonetheless, election-bound countries such as Peru and Mexico need to be monitored. But she noted that the overall tone is cautious optimism. For instance, emerging markets saw volatility in March, but spreads were virtually unchanged for the month, insulated by robust inflows into the asset class.

"Why not hold onto that and grab your 200 basis points over Treasuries you can get without too much effort," noted the source.

Peru retraces gains

Elsewhere, Peruvian bonds retraced some early gains, as it appears that former president Alan Garcia has pulled ahead of market-favorite Lourdes Flores for second place in this Sunday's presidential election. The two candidates are battling it out to see who contends in May's run-off election.

Nationalist Ollanta Humala nabbed 29.54% of the vote, securing first place with 74% of the vote tallied. The market took comfort that Humala did not garner more of the popular vote, which helped spreads narrow by 23 basis points during the earlier part of the session. But with Garcia and Flores still in a dead-heat, the market is jittery. By late afternoon, those gains were mostly given up, and the debt ended narrower by eight basis points on profit-taking.

"If it's Flores, then it's great - obviously with the hope that she can beat Humala" remarked the buyside source.

"If it's Garcia and Humala, it's still not great but it's still not the worst case scenario in which Humala would have won [this Sunday's election]," noted the source.

As sources had noted earlier, those who had remained vested in Peru were brave souls. The buyside source had reduced her holdings as early as December.

"I don't see the point in throwing yourself ahead of the train. It's very, very volatile," noted the source.

"You really have to wait it out till the last minute," she noted, adding that Peruvian polls tend to display a high margin of error. For instance in 2001, president Alejandro Toledo was not picked as a favorite to win the presidential election, according to election eve polls.

Furthermore, even if former president Garcia was to win the run off, he is shrouded in uncertainty. Questions persist as to whether he will be more market-friendly than he was during his first presidency, which ran from 1985 to 1990.

Nonetheless even if a leftist takes control of Peru, the buyside source is not worried of a spillover effect into other Andean countries. Colombian president Alvaro Uribe is expected to win his re-election bid in May. Ecuador has its own host of problems, independent of Peru, noted the source.

"Venezuela - we love it the way it is," she remarked.

"If Humala were to win - that being the worst-case scenario - that might have a little pressure on the region. If Garcia wins, I don't see a reaction either way."

During the session, the Peruvian bond due 2033 added 1.50 to 110.75 bid, 112 offered.

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