Emerging market debt gains on rise in 30-year U.S. Treasury; EM sees record $851.89 million inflow

By Reshmi Basu and Paul A. Harris

New York, Feb. 9 - Emerging market debt bounced higher Thursday after the successful auction of the 30-year U.S. Treasury bond, which saw strong demand from foreign buyers.

In other news, emerging market debt saw an all-time record for weekly inflows.

Dedicated funds took in a whopping $851.89 million for the week ending Feb. 8, according to EmergingPortfolio.com Fund Research.

This week crushed the previous record, which was set in March 2005 when funds saw $497 million of inflows for the week.

In the afternoon, the Treasury sold $14 billion of 30-year bonds, the first sale in the maturity since 2001. The auction saw an indirect bid of 65.4%, which signaled a high participation rate by foreign central banks.

"We were trading in a range before the big Treasury auction today [Thursday] and after it [the auction] priced well, the long bond was up a decent amount, and the [EM] market traded quite well," remarked a trader.

Additionally, after the auction numbers came out, the market saw heavy volumes. There was both two-way local flow as well as U.S. investors taking part.

"We've heard a lot of short covering in the past half hour...as people are getting kind of nervous," remarked the trader towards session end.

During the session, Brazil and Venezuela were among the session's best performers.

The Brazil bond due 2040 gained 0.40 to 129.85 bid, 129.95 offered. The Venezuela bond due 2030 added one point to 125.50 bid, 126.25 offered.

And Argentina continued to ride higher. The Argentina discount bond due 2033 was up one point to 94.75 bid, 95.25 offered.

"People have been long for a while. There have been stretches of profit taking. Argentina is one of the highest yielding in the market right now, so people have the need to own it," added the trader.

Elsewhere the Brazilian corporate market was strong, up quarter to one half of a point, according to an analyst, who added that locals have been fueling the rally.

Locals are banking on the completion of a tax exemption deal.

Indeed the strength of the 30-year bond has given support to both U.S. Treasuries and emerging markets, according to a trader who focuses on Asian credits.

"The backdrop is pretty strong for EM generally. And Treasuries have given the market a good bid as well. So the market has definitely turned around over the course of the New York session," added the trader.

He noted that that there had been a fair amount of synthetic product printed which has give the credit derivative swap market some strength, which is also feeding its way into the cash market as well.

Philippines shrugs off Moody's

On Thursday, Standard & Poor's revised its outlook for the Philippines to stable from negative. The news came after Moody's Investors Service said it would affirm the ratings for the sovereign but left the outlook negative.

There was some expectation that Moody's would change its outlook, said the second trader. A number of people were hoping that the outlook would go from negative to positive, he noted, adding that realists were expecting it to go to stable.

But Moody's chose to do nothing, resulted in a little trading weakness for the sovereign.

"There was a little selling when the Moody's news hit, but that was overtaken by the general market strength, and then S&P revised their outlook," he said,

"We're hitting all-time tights on the sovereign side, and there really isn't that much upside liquidity out there.'

During the session, spreads for the Philippines bond due 2030 tightened by seven basis points over Treasuries.

In other developments, news is impacting the high-yield side, noted the trader.

He said the chairman of Asia Aluminum submitted a proposal to take the company private.

"That's the first time we've seen that sort of MBO-type [management buyout] risk affecting an Asian bond in recent times, and the bonds are down a couple of points," he remarked.

Finally, The Philippines' Metropolitan Bank and Trust Co. (Metrobank) placed a $125 million issue of tier 1 perpetual non-cumulative fixed-rate/floating-rate notes (B2) at par for a yield to call of 9% via UBS.

"Given the high quality of the credit, we managed to build an impressive order book with nearly 30% of the securities place with European and off-shore accounts, and the balance placed across the Asian region," said a banker at UBS in a news release.

The order book was more than $1 billion.

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