Emerging market debt spanked as 10-year Treasury note pierces 4.74%; Colombia buys back $600 million

By Reshmi Basu and Paul A. Harris

New York, March 5- Emerging market debt came under pressure Monday as the yield on the 10-year Treasury note hit 4.74%.

In the primary market, the Republic of Colombia (Ba2/BB/BB) purchased $600 million in dollar- and euro-denominated bonds via a modified Dutch auction Monday.

Additionally, the government sold $306 million in a retap of its 12% global TES bonds due Oct. 22, 2015 to help fund the buyback, according to a market source.

The government cancelled an issuance of new global TES bonds due March 12, 2021, noted the source.

Also during the session, two corporates issued price guidance.

Russia's Petrocommerce Bank talked its $150 million to $200 million offering of three-year global bonds (Ba3/B) at a yield in the 7¾% area.

The roadshow is expected to wrap up on Tuesday in London.

Credit Suisse and UBS Investment Bank are bookrunners for the Regulation S offering.

And power company Korea Midland Power Co. Ltd (Komipo) set price guidance for a $200 million issuance of senior unsecured fixed-rate notes (A2/A-) at mid-swaps plus the low-40s basis points.

Credit Suisse and UBS Investment Bank are managing the Rule 144A/Regulation S transaction.

EM down on rate worries

Emerging market debt slid Monday on a rout in U.S. Treasuries. The yield on the 10-year note jumped to its highest level since June 2004 on concerns that both the European Central Bank and the Bank of Japan look to be raising interest rates. Higher rates for Japan means the unwinding of the yen carry trade, an uncomfortable scenario for emerging markets, observed sources.

Additionally, the market is jumpy, fearing that Friday's release of non-farm payrolls data in the United States may indicate more Fed tightening.

The yield on the 10-year Treasury note climbed to 4.74% from Friday's close of 4.68%. And that jump put pressure on the emerging markets asset class, noted a trader who focuses on Asian credits.

The trader added that there was some widening on the Latin American side, and to a lesser extent on the Philippines and Indonesian side.

"But there has definitely been some weakness from this Treasury volatility," he said.

Additionally, Indonesia's new bond due 2017 has been impacted, he added. The deal was sold last Thursday.

"Dollar prices have moved down but in spread terms there has not been very much widening in comparison to the other markets."

He said the Philippines had already underperformed recently because of political uncertainty, so the pullback was less drastic there.

Indeed, prices fell across the curve for most emerging markets, noted sources.

The session opened weaker and ended at its lows, according to a market source. Moreover, there was two-way trading with small net buying.

During the session, the Brazilian bond due 2040 lost 1.25 to 130.50 bid, 130.60 offered. The Colombian bond due 2033 fell 2 points to 143.80 bid, 144.25 offered. The Turkish bond due 2030 eased 1.13 to 156.25 bid, 156.75 offered.

The sell-off is to be expected, noted Enrique Alvarez, Latin American debt strategist for IDEAglobal.

"The market was looking for an excuse, a catalyst...to come and force a real round of profit taking," he said, referring to the ECB's hawkish statements and predictions the Bank of Japan will raise rates. Last week there were rumors that the Bank of Japan would halt its ultra-loose monetary policy. The announcement could come as soon as Thursday, when the bank ends its two-day meeting.

The combination of action from the ECB and the Bank of Japan has ignited speculation that there may be an unwinding of some of the leveraged trades that are happening, remarked Alvarez, such as the very cheap financing afforded by the Bank of Japan in yen.

"The yen dollar carry trade may sort of affect higher risk investments, so that's why I think the market has gone along and taken some profits here," he observed.

Furthermore, Monday's session was different from last week's losses as spreads widened more sharply, perhaps signaling that investors are becoming more risk averse.

Nonetheless, the days of easy financing are over for the short-term, sources noted.

"The moves by Europe and Japan are tiny in nature, so it's more speculation and perception than actual hike in rates of any significance," noted Alvarez.

But he pointed out that over the medium term, if the United States is to enter a prolonged economic slowdown coupled with a U.S. housing slump, monetary policy could be reversed in nine to 10 months or even further.

"You can't necessarily conclude that easy money is done with over the medium term," he said.

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