Emerging market debt track equities, commodities lower; Philippines requests proposals

By Reshmi Basu and Paul A. Harris

New York, June 6 - Emerging market debt slipped Tuesday, taking its cue from weaker global equity markets and lower commodity prices.

In the primary market, the Republic of the Philippines has sent out a request for proposals to investment banks as it seeks to complete its 2006 funding by raising up to $1 billion in the international debt market.

Tuesday's session saw emerging market debt fall on increased risk aversion in equity markets, triggered by ongoing worries about a potential cool down in the U.S. economy and the undefined direction of U.S. monetary policy.

The moves were in contrast to Monday's trading, which saw spreads for emerging markets tighten on the announcement that Brazil would buy back up to $4 billion of foreign currency-denominated bonds. That technical story helped the asset class dismiss weaker U.S. equities and hawkish statements from Fed chief Ben Bernanke.

By the end of Tuesday's session, the JP Morgan EMBI Global Diversified Index lost 0.2% while spreads widened 5 basis points to 221 basis points versus U.S. Treasuries.

Latin American bonds posted losses as Colombia and Peru were counted among the worst performers of the day.

Colombia saw its component of the EMBI index widen by 12 basis points while Peru's portion of the EMBI kicked out by nine basis points.

During the session, the Brazilian bond due 2040 shed 0.20 to 123.65 bid, 123.90 offered. The Argentinean bond due 2038 lost 0.40 to 34.60 bid, 34.85 offered. The Colombian bond due 2033 gave up 1.50 to 129.50 bid, 130.50 offered.

Meanwhile sentiment in Asia was better Tuesday, but the market was still under pressure, according to a trader who focuses on Asian fixed income.

The trader observed that the market has been stress-tested very hard in recent weeks. Additionally, trading has been super-volatile and super-choppy.

Asian bonds have been strongly influenced by the weak performance seen in emerging equity markets, but that impact waned slightly during Tuesday's overnight session in Asia as well as in New York trading. But by no means did the securities rally Tuesday.

"We are now lower, in price terms, on the sub-investment grade sovereigns [Philippines and Indonesia]," the trader said. "Credit default swaps (CDS) have actually come in a little bit off of the wides today [Tuesday.]"

Selling pressure has eased somewhat, noted the trader, who added that most of the region's credits are still at or near their recent weakest levels on both price and spread terms.

The trader remarked that high-grade paper in Asia was doing okay, noting that both Indonesia and the Philippines are trading close to the same levels as last week.

Credit default swaps in the Philippines are still soft, but there has not been much movement.

"But 'choppiness' is the name of the game at the moment. It's pretty volatile, and we are pretty vulnerable to what is going on in other markets," the trader said.

Moreover, the market's recent correction has not prompted investors to start buying, according to a market source.

Positions may have cleaned up somewhat, but "sitting on cash appears to be the preferred strategy," according to the source, who added that flows into the asset class appear better.

Primary market stalled

Sources have noted that stability is needed to jumpstart the primary market, which has stalled on the market's current round of volatility.

There are issuers waiting to tap the capital markets, but while the market remains choppy it is too difficult for deals to get done, according to the trader.

Normally after a period of volatility, the market takes comfort once the straight high-grade deals are completed.

"Then you get some of the more cuspy high yield-type issues, once they get done, people become a little more confident that there is some depth to the primary market, which feeds through and helps the overall market.

"But things are still very volatile. It's still too early to test the market with a lot of supply because things are changing on a day-by-day basis," he told Prospect News.

This week Indonesia's PT Matahari Putra Prima Tbk will test the market's appetite for risk. The retailer set price talk for a $150 million offering of five-year bonds (B1) in the 9% area.

Credit Suisse and UBS are lead managers for the deal

The book is being built and the deal should price Wednesday or Thursday.

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