Emerging market debt cautious ahead of Friday's jobs data; Malaysia's Penerbangan sells $1 billion bonds

By Reshmi Basu and Paul A. Harris

New York, March 9 - Emerging market traded in tight ranges Thursday ahead of Friday's release of non-farm payroll numbers in the United States.

But that caution marked an improvement from the sell off seen in sessions earlier in the week.

In the primary market, Penerbangan Malaysia Bhd. sold a $1 billion offering of 10-year global bonds (A3/A-) at 99.864 to yield a spread of 35 points over mid-swaps.

The issue priced at the tight end of price guidance of 35 to 38 basis points.

The deal was not easy to price, given that there has been quite a significant amount of selling in the Asian high-grade market in the past few days, according to a trader who focuses on Asian fixed income.

Most of the sell-off was due to the U.S. Treasury weakness but Penerbangan's expected issue also played a part.

Penerbangan tried to tap the market in October but was unable to get the deal done because of what were called "documentation issues."

"It's a guaranteed deal," noted the trader.

"When the market is doing well you can get these guaranteed deals done very close to the theoretical sovereign curve.

"But when the market is not that strong, people demand more of a premium for taking the guaranteed risk, even though that risk is marginal," observed the trader.

CIMB Bhd., Deutsche Bank and Morgan Stanley managed the Rule 144A/Regulation S transaction.

And Russia's Petrocommerce Bank sold a $200 million offering of three-year bonds (Ba3/B) at par to yield 8%, according to a market source. The deal priced on top of price guidance of 7¾% area.

Credit Suisse and UBS Investment Bank were bookrunners for the Regulation S deal.

EM sideways ahead of job numbers

Emerging market debt saw an uptick in momentum at the start of the New York trading session as spreads narrowed by five basis points, noted sources.

But an afternoon U.S. Treasury sell-off caused the asset class to give back some of the early morning gains, observed a buyside source.

At session's close, spreads were narrower by two basis points. During the session, the Brazilian bond due 2040 added 0.35 to 129.85 bid, 129.90 offered. The Ecuadorian bond due 2030 gained 1.30 to 96.25 bid, 97.25 offered. The Russian bond due 2030 moved up 0.13 to 110.25 bid, 110.375 offered.

"I don't think anyone wants to take any major risks here before the number [payroll numbers] tomorrow [Thursday]," noted the buyside source.

Emerging markets has seen a serious pullback in the past four or five sessions, but has been relatively stable for the past 24 hours, according to the trader quoted above.

"There was a lot of chop in the latter part of last week and the early part of this week. Then things slowed down heading into the non-farm payroll numbers on Friday," he added.

Sources noted that the catalyst for the plunging prices in recent sessions has come from external factors rather than from within the asset class.

"This whole sell-off was not caused by anything going on in emerging markets," remarked the buyside source.

"It was a global risk reduction. We saw it starting off with Treasuries and then it spilled over into equities and to our asset class as well."

Moreover, the source said more than anything, hedge funds played into the market's recent performance.

"I don't think real money accounts sold into this.

"I think the flow that caused most of the sell-off was probably just Street driven and hedge fund driven and trading accounts that were in for a good run so far - they rallied a lot - and they got stopped out of some of the trades," noted the buyside source.

And real money accounts have been behind the latest buying sprees, an indication that the market mentality is to buy on dips, noted the source.

"The question, of course, is, is this the first leg of something bigger or at what level do people decide to throw in the towel and say: 'okay, I have to buy this thing, especially on the dollar-denominated market.'"

Furthermore the dollar-market will see a scarcity value component as issuances will be lower, but flows remain strong.

Higher global rates

Nonetheless, investors are gearing up for higher global interest rates. Last week, the hawkish European Central Bank raised rates while on Thursday the Bank of Japan ended its ultra loose monetary policy. And there does not appear to be a pause in the Federal Reserve's current monetary tightening campaign, especially if Friday's pivotal job numbers prove potent enough.

"Everyone is trying to reduce liquidity in the G7 world," observed the buyside source.

The source does point out that part of emerging market's rally this year stems from positive fundamentals and increased liquidity in the global markets. But even without one of those factors, a good fundamental story is left.

"I think the improved technical picture is going to mitigate the effect of lower liquidity in the global market because I think those inflows are still going to continue," the buyside source told Prospect News.

Nonetheless, the source noted that the asset class is entering a new world.

"It's still a carry trade. Fundamentals have improved and credit quality has improved so spreads are fairly valued here."

As one sellside source noted earlier this week, emerging markets has seen a period of sell-offs during the first half of the year, normally towards the second half of April.

This recent bout is nothing like last March's sell-off or even close to the bloodshed that occurred two years ago. But since the market's prolonged run up over the past months, investors have become unaccustomed to seeing red prices on their screens.

"The correction has not been that significant yet," noted the buyside source.

"The million dollar question is: Is it going to really be a blow-up? Or is all this money waiting on the sidelines, ready to buy, going to buy on the dips and bring it back in?"

Colombia up after Moody's outlook change

In other news, Moody's changed the outlook on Colombia's credit rating to stable from negative.

During the session, the Colombia bond due 2012 added 0.15 to 118.80 bid, 119.40 offered.

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