Emerging market debt treads higher on absence of market news; Turkey recovers after E.U. headlines

By Reshmi Basu and Paul A. Harris

New York, Sept. 28 - Emerging market debt moved higher Wednesday, a day after a brief session of profit taking.

Meanwhile in the primary market, Taiwan's Cathay United Bank Co Ltd. sold a maiden offering of $500 million in 15-year bonds at 99.977 to yield 5.503%, (Issuer rating: A3/A) via JP Morgan.

Out of Korea, Woori Bank sold $500 million of five-year notes (Baa1/A-) at 99.628 to yield 83 basis points more than Treasuries.

ABN Amro, BNP Paribas and UBS Investment Bank were the joint lead managers for the Rule 144A/Regulation S transaction.

And the State of Israel sold €750 million of 10-year bonds (A2/A-/A-) at 99.688 to yield mid-swaps plus 53 basis points or a yield of 3.78%.

The issue priced at the tight end of price talk of 53 to 55 over mid-swaps.

Deutsche Bank and Morgan Stanley were the lead managers for the Regulation S transaction.

Also, market sources said that there were two rumors of possible issuances from Lebanon and Poland.

EM grinds tighter

Emerging market debt grinded even tighter Wednesday, said market sources.

During the session, Turkish bonds saw pressure on Austrian resistance to Turkey joining the European Union.

The E.U.'s Permanent Representatives Committee (Coreper) started Wednesday to discuss Turkey's framework for accession negotiations. Austria wants to add an option of preferential partnership, which is a no-no to Turkey.

Turkish bonds fell in response to the headlines but recovered, as the market believes this will not serve as block to its accession talks scheduled for Oct. 3.

By the end of the day, the Turkish bond due 2009 was unchanged at 123 bid while the bond due 2030 was up 0.31 to 147 1/8 bid.

Meanwhile, the Brazil bond due 2040 gained 0.45 Wednesday to 121½ bid. The Russia bond due 2030 added half a point to 114 5/8 bid.

The buyside source said that the market has detached itself from U.S equities and Treasuries and has traded in its "own flow-driven world."

Flows slowing down

Flows into the asset class are credited for the market's continued positive performance, noted a market source.

But the source added that liquidity may be coming down as year-end approaches.

Nonetheless spreads could tighten further as long as the appetite for risk continues, added the source.

Investors have become frustrated since finding value in emerging markets has become as difficult as finding a needle in a haystack.

"Most of the investors who have been in this market, are obviously happy to have those gains but at the same time are wishing that they had more," remarked a buyside source.

When to sell has become a key question for investors, observed the source.

"The frustrations come from the fact that...valuations are fairly tight to fundamentals, but as long as you don't necessarily see the trigger on the horizon for the sell-off, why would you sell?"

Indeed, valuation was a key concern for participants at last weekend's International Monetary Fund meeting. But no one had an answer as to where to find it, noted the buyside source,

The source said that local markets may be the answer in countries such as Brazil, Egypt, Mexico, Peru and Turkey. Turkey still needs to see more selling for a good entry point.

"Everything is tight. So in that context, everyone is trying to go for yield," said the source, adding that those countries had good fundamental pictures.

"Most of them are easing cycle stories.

"Of course if volatilities pick up, they can suffer more than external debt.

The source also predicted that through year-end the environment will be positive.

Furthermore, the market will continue to trade in tight ranges and sell-offs will be short lived as paper is brought back quickly.

"The technicals are quite positive. There's not that much issuance on the calendar. Funds seem to continue to flow to the market," the source told Prospect News.

Just what will trigger a sell-off is anyone's guess. Most likely the catalyst will come from the external side such as oil or the U.S economic story. There are just so many possibilities but no clear view, remarked the buyside source.

However, one sure thing is that 2006 will be a volatile year as many emerging markets see elections.

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