Emerging market debt slides on global interest rates worries; Mexico issues $3 billion in new bonds

By Reshmi Basu

New York, March 3 - Emerging market debt turned lower Friday as U.S. Treasuries were knocked down by worries that global interest rates could jump higher.

In the primary market, Mexico sold $3 billion of sovereign bonds due 2017 at 99.121 to yield 5.736% via Goldman Sachs and Morgan Stanley.

Proceeds from the sale will be used to fund the country's $2.9 billion tender offer.

Also tapping the capital markets, Argentine cement company Loma Negra C.I.A. SA sold a $100 million issue of seven-year senior notes (expected ratings Ba3/BB) at par to yield 7¼% via Morgan Stanley.

And Inter Rao UES sold $150 million of two-year credit-linked notes (non-rated) at par to yield 7¾%.

The issue priced at the tight end of revised price guidance. Guidance had been revised to 7¾% to 8% from 8% to 8¼%.

Citigroup was the bookrunner for the transaction.

The issuer is a subsidiary of Russian state-controlled utility RAO UES (B+).

EM heads lower on global rate worries

Emerging market debt continued its two-day slide on a dive in U.S. Treasuries Friday.

On Thursday, Treasuries fell after the European Central Bank raised its benchmark rate to 2.50% from 2.25%. The central bank also signaled that more rate hikes are likely for Europe, which created fears that the sentiment would spill over into the United States

And indeed, Thursday's sell-off carried over into Friday's session on increasing worries that global rates would spike at the same time. Adding to consternation, Japan looks to be halting its extremely low rate policy as the country saw its biggest jump in consumer prices in eight years.

Friday's session saw spread widening on consolidation, according to a trader.

"Prices are generally lower, but not as low as they were mid-morning. They recovered about half of what we had been down," he said.

"Spreads overall didn't do too poorly," he added.

During the session, the Brazilian bond due 2040 lost 0.60 to 131.75 bid, 131.85 offered. The Russian bond due 2030 eased 0.75 to 111.563 bid, 111.75 offered. The Venezuelan bond due 2027 fell 0.95 to 128.35 bid, 128.70 offered.

Moreover the trader added that such a sell-off was expected, given the market's recent run up.

A sellside source concurred: "The market has come off a little bit from its tights. We all know that had to happen.

"It's a signal that easy money is going away," noted the sellside source, referring to the Treasury movement and to the ECB's decision.

Up until Thursday and Friday, the asset class had been emboldened by headline news that several Latin American countries were buying back debt. Spreads hit record lows on diminished supply and strong flows into the market. This week saw $667 million pour into the asset class, according to EmergingPortfolio.com Fund Research.

Nonetheless the sellside source pointed out that it was important to note the differences among the different buyback programs.

"Brazil and Venezuela are just taking out old Bradys by using extra cash... to do it. Some of that is self-funding because you release collateral from the collateralized bonds, so it's not as big as it sounds," remarked the source, noting that it was a good strategy.

Meanwhile Colombia is doing a variation on the traditional strategy by replacing external debt with local debt.

To an extent, Mexico's new issue Friday is meant to extend the maturity on its yield curve by getting rid of thinly traded bonds, noted one market source.

"They are just replacing dollar debt with dollar debt.

"They have obviously cancelled external debt in the past and that was good. But in this case, they are just moving things around the checker board," noted the sellside source.

However, the sellside source noted that its tender offer includes maturities ranging from 2007 to 2033.

"On average, it is probably going to be an extension of the maturity simply because people aren't as likely to tender the longer-dated bonds. It didn't have to be. It could have been duration neutral on a weighted basis," the sellside source told Prospect News.

Moreover, spreads for Mexico had widened compared to most others.

"When Mexico first announced its tender, people just focused on it as though it was a tender and those bonds were just going away. People forgot that there was a new issue that was going to finance it," noted the sellside source.

Then on Thursday, the market caught on that Mexico was issuing the same amount of bonds as it was taking back.

"In fact, the market may be longer in Mexico than it started. If they are extending duration on a duration-weighted basis, the market is going to be longer in Mexico than it started before this deal," the source noted.

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