Emerging market debt trades flat to lower in listless market; Malaysia's Tenaga sets talk

By Reshmi Basu and Paul A. Harris

New York, April 26 - Emerging market debt traded flat to lower in a directionless market Tuesday, while Ecuadorian bonds begin to look cheap to some buyers.

Meanwhile Tenaga Nasional Malaysia Bhd. set talk on its $250 million minimum offering of 10-year notes.

With no drivers to prod trade along, emerging market debt saw light volumes, said sources.

"It was an amazingly boring day," said a sellside source.

With current levels, there is little incentive for investors to re-enter the market, remarked the source.

"Our market has been holding up pretty well. I think people still don't feel especially comfortable with the levels that we are at right now.

"I don't think that anyone feels like they want to drive them higher unless you have some real news out there doing it," remarked the source.

With no news to ignite a reaction, emerging market debt was listless during Tuesday's session. The JP Morgan EMBI+ Index fell 0.08% while its spread to Treasuries tightened two basis points to 387 basis points.

"Investors and traders are done bidding for the month," said a trader.

"There are plenty of sellers but that doesn't make a market," he said.

In late afternoon, the Brazil C bond was spotted at par, up 1/8 of a point while the bond due 2040 rose 0.10 to 114 bid. The Mexico bond due 2009 was quoted at 118.20 bid, down 0.35. The Philippines bond due 2025 was spotted at 107½ bid, down 5/8 of a point. The Russia bond due 2030 was quoted at 105.687, down 0.126.

"The sovereign market is a little better," said the trader. "There is some two-way flow, but not robust. At least it's not a vacuum like you see in the high-yield space."

He added that there were no bids for high yielding Asian corporate paper.

"The Asian high-yield market is effectively closed," he said.

The market will remain directionless until there is "good news" to inspire investors to start adding risk, said the sellside source.

"Our market has really outperformed the other markets recently. For us to continue to do that, something needs to take us higher.

"If high grade and high yield continue to grind tighter, that helps our market, obviously. And again, partially that means that we are not outperforming as much, so they are playing catch up to us," remarked the source.

Emerging market debt has been trading with equities lately, as it decouples from U.S. Treasuries, said sources.

"In the last couple of weeks all of the credit markets have been trading like S&P surrogates," said the trader.

"Every risk asset is going the same way.

"Rate fears and Fed fears have been relegated to second-tier status. People are now mostly concerned with what's happening in the stock market. It seems to be the principal market at this point," he commented.

Ecuador up

Meanwhile Ecuadorian paper moved up Tuesday, as some thought it is beginning to look cheap after several days of sell-offs. The bond due 2012 moved up three points to 79½ bid while the bond due 2030 was spotted at 93½ bid, also up three points.

In recent sessions, Ecuador's paper has been spooked by comments made by the new administration, which wants to redirect funds for social programs.

Last week, Ecuador's prices were hit by the ouster of president Lucio Gutierrez. The market was further spooked by comments made by his replacement Alfredo Palacios, who has suggested earmarking more of the oil stabilization funds for social spending.

The new economic minister Rafael Correa has also said he wants to redirect funds for social programs.

"Ecuador is much quieter today [Tuesday] than it was yesterday [Monday]," said the sellside source.

"Obviously, no one is very enamored of this team so far. But I don't think it's been a wholesale rush on its paper by any means," said the source.

The source added that more people have been looking to buy the paper than to sell.

"Part of that reflects a market where most things seems pretty expensive, so if there is something that suddenly seems cheap, people pay attention to it."

"Obviously, it should be cheap. It's just a question of what's the right price."

Tenaga sets talk

Meanwhile Tenaga Nasional Malaysia Bhd. is talking its $250 million minimum offering of 10-year notes at mid-swaps plus 75 basis points, according to a syndicate source.

"This deal should do pretty well," said the trader.

"They are pricing it right. It sounds like they are building a solid book. I heard that it should come around 120 basis points over the 10-year Treasury."

"Some people are looking at it as the first deal out of the Asian market since the sell-off, and are anxious to see how well it does," noted the trader.

But the sellside source said that Tenaga's new issue would not serve as a litmus test for the overall market.

The source likened the new deal to Celulosa Arauco y Constitucion SA, which priced an upsized $400 million of 10-year bonds (Baa2/BBB+/BBB+) at 99.525 for a spread of Treasuries plus 132 basis points on April 14.

Tenaga "is a very infrequent issuer. It will come at very tight prices. It's a small deal," commented the source.

The trader also agreed that Tenaga could not be used as benchmark to measure the primary market's appetite.

"This is a deal with training wheels on it," he said.

"The proceeds are earmarked for debt buyback; 100% of the proceeds are going to take out shorter maturity debt.

"And the size of the deal, while not immaterial, is not substantial either: it's expected to be $250 million to $300 million, which is pretty small.

"It should do just fine."

Pricing is expected to take place this present week.

Barclays Capital, CIMB Bhd. and Credit Suisse First Boston are joint bookrunners for the Rule 144A/Regulation S offering.

In the primary market, there are no pipeline deals that represent a widely distributed deal, said the sellside source.

"What you would look for is something that was pretty broadly defined," such as United Technologies, which sold $2.4 billion in the high-grade market Tuesday, noted the source.

"I think you would want to see something like that where you would see a lot of different players - ideally, in different geographies."

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