Emerging market debt sluggish; funds see $12.6 million outflows; Brazil trades down

By Reshmi Basu

New York, July 8 - Emerging market debt slid Thursday, a day after Brazil caught investors off guard with a $750 million sovereign issue.

"Everyone is looking at their stuff, not really trading the Asian book right now," said a trader.

Trading in Latin America was even "slower" with "nothing too interesting to report."

"It's pretty quiet out there today," added the trader.

Overall prices for emerging market debt were down. The JP Morgan EMBI Global index fell 0.52% during Thursday's session. Its spread to Treasuries widened six basis points to 482 basis points.

Outflows at modest $12.6 million

Emerging market bonds saw a modest $12.6 million of outflows during the week ending July 7. This reduced year-to-date inflows into these funds to $329.4 million or 2.1% of their total assets, according to EmergingPortfolio.com Fund Research.

The loss of money was the tenth consecutive weeks of outflows.

On the other hand, global bond funds had inflows of $112.2 million in the latest week and have had inflows in five of the last six weeks. Year-to-date inflows now amount to $2.2 billion or 3% of their total assets.

Brazil's new deal raises questions

With little other news, much of the focus Thursday was on Brazil's new deal.

Market sentiment was split as to whether or not Brazil's decision to issue the $750 million 10-year sovereign late Wednesday afternoon was the right one. The bonds priced to yield 10.8% via bookrunners Deutsche Bank and Morgan Stanley.

"The Brazil bond received entirely too favorable of a press for a deal that prices at 98.192 and immediately trades down one point in the market - that equates to 15 basis points in widening in this bond alone, not to mention the fact that it has put pressure on other markets, including Turkey and Russia," said one market source.

The source added: "The transaction was ill-timed. Bottom line: not necessarily the wrong price, but not the right time to access the market."

Furthermore, others criticized the deal for being ill conceived.

"What surprises me more than the fact that it was marked down ¾ of a point today when a lot of Brazilian and Russian bonds are marked down nearly a point is that they set up for this," said a source.

The source said he concluded that the underwriters were not expecting the deal to go well, given that they priced it at 5 p.m. ET and then freed it to trade 10 minutes later.

"Immediately it traded down," said the source.

"They didn't support the issue. They didn't have a re-offer price bid," he added. "They pretty clearly set themselves up for being able to walk away the next day and say, 'now the bonds are half a point lower with the market.'

"They avoided what underwriters often have to run into when deals are not particularly well placed - of standing there at 11 a.m. in New York getting hit with $75 million of a deal that they don't particularly want to own at the reoffer price if they want to support the deal."

But, the source added: "It hasn't underperformed dramatically. It wasn't a flameout."

There was no response to a call to one of the bookrunners.

However, others said the timing for Brazil was opportune, given the relatively low rates.

"Historically, rates are still fairly attractive for Brazil to issue," said Steve M. Hope, managing partner of Outrider Management.

"It's not 1997, but it's not 2002.

"I think that this is a good window for them to raise money. And rates are definitely rising in the United States over the next several months, and that will probably mean that longer term rates rise in the Treasury market.

"And historically, it means that emerging market spreads tend to widen.

"The bond market has been doing quite well in the last month and it seems an opportune time to issue," he added.

Another trader said that Thursday's trading saw "big volumes in Brazil" because of the new issuance.

He said that there is demand for new deals now.

"It wasn't executed that well, but the timing was there," commented the trader.

Overall Brazilian paper was down. Its bond due 2040 was down 1.7 to 93.65 bid during Thursday's session. The C bond was down 0.625 at 91.875 bid.

Brazil's component of the EMBI Index was down 1.09%. Its spread to Treasuries widened 15 basis points to 644 basis points.

Elsewhere in trading Thursday, the Turkish bond due 2030 was down a point to 121½ bid. Its component of the EMBI slipped 0.19% while its spread to Treasuries widened six basis points to 428 basis points.

And Russia continued to slide over investor concerns about liquidity problems at its banks.

The Russian bond due 2030 fell 1.125 to 90½ bid.

Good time to issue, investor says

Despite the recent new deals, the market is not oversaturated with debt, according to Outrider's Hope. He said there should be more paper in the market, given that yields are at fairly low levels. If the market does not see new issuers, then it may that current levels reflect technicals rather than investor confidence in fundamentals.

"It's a great time to raise money. The surprising thing to me in the first quarter of this year was how few new deals came - and how many new deals that did come were not well received," noted Hope.

"From a backdrop standpoint, things haven't changed.

According to Hope, it is a good time for issuers to come to market.

"If we continue to see a relative scarcity of new deals, it's pretty telling that the market does not have a lot of confidence in the price levels that we are at - and we are really where we are because of technical factors.

"Suppliers are trying to do their best to rectify it, but buyers aren't interested," added Hope.

1 sovereign, 1 corporate price

In new deal action Thursday, the Republic of Cyprus priced €500 million of 10-year bonds (A2/A) at 99.295 to yield 12 basis points over mid-swaps or 4.464%.

The deal was the country's first in two years and its first since joining the European Union in May.

The sovereign came at the tight end of price talk which put the spread at mid-swaps plus 12 to 14 basis points.

Credit Suisse First Boston and UBS Investment Bank ran the books.

Hong Kong's Road King Infrastructure Ltd. priced an upsized $200 million of seven-year notes (Baa2/BBB-) at 99.91 to yield 212 basis points more than Treasuries.

The deal was increased to $200 million from $150 million.

HSBC Bank ran the books on the Regulation S deal.

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