Emerging market debt firmer during quiet session; two corporates added to pipeline

By Reshmi Basu and Paul A. Harris

New York, March 31 - Emerging market debt saw a steady session Friday as U.S. Treasuries took a breather at the end of a volatile week.

In the primary market, two corporates added to the pipeline. Korea Zinc Co., Ltd. plans to issue $100 million of three-year floating-rate notes via ABN Amro.

Pricing is expected to take place during the week of April 3.

Elsewhere Kazakhstan's Bank Alliance will start a roadshow next week for a dollar-denominated two-part offering of senior notes and subordinated tier I perpetual notes.

The tranche size of the senior notes (Ba2/-/BB-), with a maturity of five to seven years, is to be announced. Meanwhile the tranche of perpetual notes (B1) is expected to be $100 million to $150 million.

On Thursday, Singapore's Chartered Semiconductor Manufacturing Ltd. sold $300 million in senior notes due 2013 (Baa3/BBB-) at 99.053 to yield 6.42% or 157 basis points more than Treasuries via Goldman Sachs & Co.

The deal took the market a little by surprise, according to a trader who focuses on Asian fixed income.

While it is a relatively small deal, the company is well established with five-year and 10-year paper already.

"It just kind of sat on the curve, marginally cheap, and seemed to go okay," noted the trader. In the secondary, the new bonds hovered around the reoffer price.

"It barely traded yesterday [Thursday]. And Asia was virtually closed today [Friday] because of a big Credit Suisse conference this week and the Hong Kong rugby sevens, which is a big weekend party," remarked the trader.

Treasuries take a break

On Friday, U.S. Treasuries were virtually unchanged as the yield on the 10-year bond stood at 4.85%.

With no visible drivers, emerging market debt saw a quiet session but was firmer on the day.

The market was described as virtually exhausted after a hectic week by the trader.

"It never really opened up today [Friday]. Quietly it's a bit firmer," he noted.

Additionally, while not significant, there was some month-end and quarter-end buying as the market closed out the day with an okay tone.

During the session, the Brazilian bond due 2040 lost 0.05 to 128.20 bid, 128.35 offered. The Ecuadorian bond due 2030 gained one point to 100.75 bid, 101.50 offered. The Russian bond due 2030 moved up 0.31 to 109.375 bid, 109.813 offered.

Moving over to the Philippines, the trader quoted above noted that there is talk that the country is going to exchange its Brady bonds for new debt.

He added there has not been a formal mandate but that the department of finance has hinted that it would happen.

EM resists drop in Treasuries

Nonetheless, the dollar-pay market has proven resilient as U.S. Treasuries marked a new territory during the week. On Thursday, the yield on the 10-year note hit a nearly two-year high. Despite higher yields, the JP Morgan EMBI Global index tightened by three basis points while returns were down 0.1% on Thursday.

And Friday proved the same as the asset class tightened again.

"What is notable is that there really has not been that much selling on the back of this last interest rate move," remarked the trader.

"It's left our market in a reasonable condition.

"Previously when we've had these big sell-offs in Treasuries we saw some selling. We haven't seen that in a significant way yet," he added.

Positive flows coupled with limited issuance served to insulate the market from Treasury volatility, noted market sources.

Overall, emerging market debt has seen choppy trading on the back of higher Treasuries in previous sessions. But a buyside source noted that if U.S. government bonds were to stabilize in the new 4.70% to 4.90% range, emerging market debt would also calm down.

"External debt, if you look at it, has not moved since the end of February," noted the source, referring to spread levels.

"There were five to 10 basis points widening, but that is really nothing.

"I think the bulk of suffering came to local markets," noted the source.

Moreover, the buyside source said the recent spread widening is a technical correction, since fundamentals are still good.

"We were bound to have something like this after such a strong rally. Also the more trading type of accounts, the hedge funds, got stopped out of a lot of these trades.

"If anything it's kind of nice to see those trades cleaned up," noted the buysider.

But the source did caution that investors will have to be more selective in where they play. No longer does the search for the carry trade justify a buyers' spree.

"I think for now we've seen a reduction in the carry trade and just buying emerging locally for the carry," remarked the buyside source.

Support for Mantega

Meanwhile investors appeared more comfortable with last Monday's resignation of finance minister Antonio Palocci.

His replacement, Guido Mantega, former head of the national development bank, has been making the rounds, reassuring investors that he would not abandon austere fiscal and monetary targets.

Furthermore, investors are satisfied with the appointments Mantega has made regarding his economic team, noted a buyside source.

In particular, the market sees the appointment of former Citigroup economist Carlos Kawall as the treasury secretary as a positive.

"I'm not necessarily concerned. I don't think he [Mantega] is going to make major changes," remarked the buyside source.

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