Emerging market debt sees volatile session; Russia Standard Vodka sets talk

By Reshmi Basu and Paul A. Harris

New York, May 24 - Emerging market debt opened with a firmer tone Wednesday, but then retraced gains as market jitters again erupted during the session.

In the primary market, Russia Standard Vodka set initial price guidance for a dollar-denominated offering of two-year credit-linked notes at the 10% area.

Dresdner Kleinwort Wasserstein is the bookrunner for the transaction. Russian Standard Bank is the co-lead manager.

On Wednesday, emerging debt was lower during a volatile session, triggered by a wishy-washy performance by equities and declining commodity prices, according to market sources.

In what is becoming a trend, the asset class gave back early gains, set off by a late afternoon bout of risk aversion.

"That's not a very good sign that every day at the end of the day, we break down," remarked a buyside source.

The source observed that the late session rout means that there is not enough conviction to sustain a rally. Instead, the rallies are being sold.

At session's end, the JP Morgan EMBI Global index closed 10 basis points wider at 220 basis points more than Treasures. Returns were down 0.5% for the day. So far this month, the index has lost 2.6%.

Volatility ahead

Meanwhile as summer approaches, liquidity is expected to dry up. Whether or not lower trading volumes are good for the market will depend on whether it is able to consolidate before then, according to the buyside source.

However the source warned that equity volatility coupled with lower liquidity could make for an unpleasant summer.

Local markets and equities have seen the blunt of the correction, but spreads for emerging market debt have moved to their widest levels since January. Sources have noted that local markets have relatively heavier positions, which is why those instruments have been more susceptible to U.S. interest rate concerns.

"There's no question the technicals are much better in external debt than in local markets or equities, so I think it's pretty unlikely that EM external debt will see the same kind of overshooting that the other markets might see," according to an emerging market analyst.

"But even after the recent sell off, valuations remain very stretched, with EM spreads around 215 [bps], still very low by historic standards," noted the analyst.

Nonetheless, the market's recent spread widening is not enough to entice investors to buy on dips.

"I think everyone is willing to miss the bottom just to make sure that there is consolidation in case there is anymore downside," noted the buyside source.

Exactly where to enter the market will be a tough call. Equity volatility and the current risk-adverse environment further complicate the story.

"It's not even Treasuries anymore," added the source, who pointed out that the asset class has lagged the Treasuries rally.

"Fundamentals, meanwhile, are starting to turn around, with fiscal and current account balances beginning to deteriorate in a number of countries," said the analyst.

"That fundamental erosion should weigh on external debt through the rest of the year."

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