Emerging market higher on light liquidity; Kiev issues $250 million bonds

By Reshmi Basu and Paul A. Harris

New York, Oct. 24 - Emerging market debt nudged higher Monday, buoyed by legislative wins of allies of Argentinean president Nestor Kirchner over the weekend.

A trader said that market ended slightly higher on short-covering.

The JP Morgan EMBI Global Diversified Index closed six basis points tighter at 262 basis points more than Treasuries.

In the primary market, the City of Kiev sold $250 million of 10-year notes (B2/B+ expected) at par to yield 8%.

The deal came in line with price guidance, which was set at the 8% area.

Citigroup and Credit Suisse First Boston were the managers for the Rule 144A/Regulation S transaction.

Out of Russia, Renaissance Securities Trading Ltd. priced a downsized $100 million offering of three-year senior unsecured bonds (//B/BB-) at par to yield 8%.

Dresdner Kleinwort Wasserstein and Renaissance Capital were joint bookrunners for the Regulation S transaction.

Elsewhere, Malaysian air carrier, Penerbangan Malaysia Bhd. withdrew its $1 billion two-part bond offering (A3/A-) on Monday, citing "documentation issues."

The prospective issuer had been marketing a $750 million offering of 10-year bonds and a $250 million offering of 30-year bonds

CIMB Bhd., Citigroup and HSBC were managing the sale.

EM up on Argentina news

Emerging market debt saw a subdued session with light volumes, according to market sources.

Despite rallies in both the U.S. equity and Latin American equities market, emerging markets debt failed to gain momentum, according to Enrique Alvarez, Latin America debt strategist for research firm IDEAglobal.

One source said that investors lacked the conviction to come back into the market, given how tight levels still are.

During the session, the asset class remained range-bound, but there were two out-performers coming out of Latin America, Argentina and Ecuador.

This weekend's mid-term elections in Argentina gave allies of president Kirchner a majority in the senate. Additionally, his supporters will now form the largest block in the lower house. That news helped Argentinean bonds gain momentum.

Ecuador saw a short covering or relief rally during the session, remarked Alvarez.

"Although the political climate continues to remain very much a question mark, there hasn't been additional pressure over the weekend," he said.

Ecuadorian bonds have come under pressure from a constitutional row. President Alfredo Palacio was blocked in his attempt to convene a 100-member constituent assembly to reform the constitution.

During the session, the Argentinean bond due 2033 was up half a point to 93¼ bid. Its portion of the EMBI Global Index narrowed 12 basis points. The Ecuador bond due 2012 gained half a point to 98¼ bid while the bond due 2030 added 1¼ points to 87.35 bid.

The Brazil bond due 2040 was unchanged at 119.45 bid. The Russia bond due 2030 was also unchanged at 111 bid.

Another big gainer was the Ukraine, whose portion of the EMBI Global Index narrowed by 19 basis points.

Analyst sees little upside

Meanwhile, the JP Morgan EMBI Global Index closed last week almost unchanged on the five trading days at 264 basis points over Treasuries. Last week, the market experienced a volatile week of trading. Mostly crossover accounts unwound their positions.

Limited issuance through year-end and advanced pre-financing bodes well for the asset class. But volatility in U.S equity markets and Treasuries look to be near-term negatives for the asset class, said a market source.

One emerging market analyst is recommending an underweight beta position, because he said he does not see much reward in this market.

"EM can hobble along around current spreads for a while, but there's very little upside in terms of capital appreciation, and there are too many factors that could spark a sell-off to warrant an overweight or even a neutral weight position.

"We're recommending over-weights in Mexico and Russia, though we prefer Mex to Russia. "Within higher-yielding credits we like Venezuela and Argentina," he added.

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