Emerging market debt falls, tracking equities; Korea's GS Caltex sells $300 million 10-year bonds

By Reshmi Basu and Paul A. Harris

New York, Oct. 19 - Emerging market debt came under pressure in trading Wednesday on increased risk aversion, as investors unwound their positions. But the market did erase some losses on an afternoon rally by U.S. equities.

In the primary market, Korea's GS Caltex Corp. sold $300 million of 10-year bonds (Baa1/BBB+) at 99.465 to yield Treasuries plus 113 basis points.

Banc of America, Barclays Capital and Merrill Lynch were the lead managers for the Rule 144A/Regulation S (without registration rights) deal.

Next, Kazakhstan's ATF Bank set price talk for a $300 million five-year offering of senior unsecured notes (Ba1/B+/B+) at 8 1/8% to 8¼%.

Deutsche Bank and HSBC are running the Regulation S transaction.

Adding to the pipeline, Taiwan's Nan Ya Plastics Corp. Ltd. plans to issue $300 million in five-year floating-rate notes (/BBB+) via Citigroup, Deutsche Bank and HSBC.

And Russia's Evraz Group SA has mandated ING and UBS Investment Bank as joint lead managers for a dollar-denominated benchmark sized bond issue (B2//BB-).

The issue will carry a tenor of seven to 10 years.

Meanwhile a roadshow is scheduled to run from Oct. 26 to Nov. 2.

EM slips, tracking stocks

In trading Wednesday, emerging markets was tracking equities more than U.S. Treasuries, said market sources. Additionally, the asset class picked up later in the session - in response to a rally in U.S. equities.

The market saw a "little bit of reversal from yesterday [Tuesday]," remarked a trader.

"Market action has been to the upside, most of that has probably been in that last couple of hours," he observed at late afternoon.

The U.S. stock market ended higher Wednesday on a fall in oil prices, a slew of positive earning reports and an upbeat reading from the Federal Reserve's Beige Book.

The Dow Jones Industrial Average gained 128.87 points to 10,414.13, putting up its first triple-digit increase in six weeks.

"We're taking our cue from equities and you're seeing some risk reduction trades," noted a debt strategist, who added that the some high beta names and exotic names were coming under pressure.

By late in the session, emerging market debt had nudged lower. At 3 p.m. ET, the Brazil bond due 2040 was down 0.15 to 119¼ bid. The Ecuador bond due 2012 lost three-quarters of a point to 97.30 bid while the bond due 2030 fell 1½ points to 86¾ bid. The Russia bond due 2030 lost 0.19 to 111.37 bid. The Venezuela bond due 2027 was bid at 113.45 bid, down 0.45.

The trader described the volume as "okay" with the normal cast of players taking part.

Oil prices drop

On Wednesday, oil prices plunged in response to U.S. government data, which showed crude and gasoline inventories piling up.

Crude oil for November delivery closed down $0.79 to $62.41 a barrel.

Oil prices look to be coming down, remarked the debt strategist, who added that market may have seen the last of the record highs.

"That reshuffles winners and losers, so it could take the shine off of the bullish petroleum stories" such as Ecuador and Venezuela, he added.

The market is yet to see the ramifications of lower oil prices since the trend is in its early stages, he said.

For instance, lower oil translates into a bullish yen and a bearish Canadian dollar. The market has yet to see a reaction in either currency.

Brazil cuts rate by 50 basis points

After trading hours, Brazil's Copom lowered its Selic rate to 19% from 19½%, posting its biggest cut in nearly two years.

The market had been expecting that monetary policy would be eased by 25 basis points, a repeat of last month's decision. But investors' dreams came true with a 50 basis point slash.

"Most investors want to see 50 bps to get the ball rolling on providing a little more monetary stimulus," said an emerging market analyst.

The debt strategist said that the large decrease makes good policy because Brazil has seen a 2% decline in the headline inflation number.

"I think 25 bps is more appropriate at this stage, as they could still cut by 50 bps in November and another 50 bps in December or January and have more or less the same effect," added the analyst.

"The most recent uptick in inflation raises some concerns, especially because it's become clear that much of the disinflation lately has been related to the stronger exchange rate, something which is not necessarily sustainable.

"I'd say the safer move would be to stick with 25 bps, waiting for more clear signals on the inflation front."

But another source said that the move would lift Brazilian bonds in the early part of Thursday's session.

Looking ahead, technicals will determine the overall health of the asset class, as fundamentals remain strong. The strategist said there is still some value in the market, found mostly in local currencies.

"We still have a relatively high interest rate and a positive balance of payments story - those tend to be our favorite short- to medium-term stories right now."

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