Emerging market debt slumps on Bernanke, U.S. stock sell-off; Rede Empresa's new issue up in trading

By Reshmi Basu and Paul Deckelman

New York, March 28 - Emerging market debt saw spreads widen Wednesday as a combination of factors drove down market sentiment. Among the negative price drivers were Federal Reserve chief Ben Bernanke's hawkish outlook on inflation, the escalation of geopolitical tension in Iran, a disappointing report on durable goods and a sluggish performance of the U.S. stock market.

In the primary market, Brazilian electricity company Rede Empresas de Energia Eletrica SA placed an upsized offering of $400 million in perpetual senior unsecured notes (B3//B expected) at par to yield 11 1/8%.

The deal, increased from $200 million, priced in the middle of price guidance of 11% to 11¼%.

The fixed-rate notes will be non-callable for five years.

In the secondary, the new issue was spotted higher at 101 1/8 bid, 101 3/8 offered.

Merrill Lynch was the bookrunner for the Rule 144A and Regulation S transaction

EM lower on host of factors

Emerging market debt turned lower Wednesday as investors contended with a combination of headaches from the external side.

Rising tension between the West and Iran has resulted in increased risk aversion and triggered a jump in oil prices of more than $1 per barrel Wednesday.

During the session, U.S. equity markets were dealt multiple blows, falling in response to the escalating Middle East tension, and then hit again by Bernanke's cautious congressional testimony.

The Fed chief noted that battling inflation was still a main concern for the central bank as the core measure remained "uncomfortably high." He also noted that the meltdown in the subprime mortgage market would hinder the recovery of the housing market.

And to make market sentiment worse, durable goods for February came in weaker than expected, suggesting a slowdown in business investment.

Furthermore, Bernanke and his predecessor Alan Greenspan have belonged to different camps when it comes to the outlook on the health of the U.S. economy, increasing investor anxiety, noted market sources.

Greenspan has been opining that the U.S. may slip into a recession while Bernanke disagreed Wednesday, saying that U.S. economic expansion has not come to an end.

All of that boosted risk aversion. At the close of the session, the Dow Jones Industrial Average index gave up 97.93 points to finish at 12,300.36.

"The [EM] market sort of got a whipsaw from the Dow," said Enrique Alvarez, Latin America debt strategist for think tank IDEAglobal.

"Spreads at the end of the day are going to be somewhat flatter due to [U.S.] Treasuries, which also backed up in yield to 4.62%

"Does it denote a lot of worry and anxiety? No, [EM] accommodated it a little bit. It gained some relief that the Dow didn't plunge," he said.

Venezuela outperforms

Meanwhile Venezuela bucked the overall trend, posting gains on the spike in oil prices.

The country's external bonds have been pressured by last week's announcement that its state oil company PDVSA would issue $5 billion of bonds in the domestic market, which it floated on Monday. Speculation surrounding the issue had been weighing on the country's sovereign curve for weeks.

But Wednesday saw a turnaround for the South American nation, which as been one of the year's underperformers.

"If you look at its EMBI+ number, it is not positive for the year where everyone else has gained 2% to 3%. It is a laggard and will be the greatest beneficiary of what is going on," remarked Alvarez.

At session's end, Venezuela's portion of the JP Morgan EMBI Global index rose 0.2% while spreads narrowed by 5 basis points.

Elsewhere, political turmoil capped any gains for oil-producer Ecuador.

A judge reinstated 57 ousted lawmakers, who were fired earlier this month for blocking president Rafael Correa's plans to rewrite the constitution. This has created a stand-off between the president and his foes.

By the close, the Andean nation's portion of the EMBI global index had declined by 0.4% while spreads had widened 3 basis points.

Mexico's pension reform priced in

In other developments, Mexico's senate approved pension reform for public sector workers, which is designed to create individual retirement accounts for new employees.

Over time, the reform is expected to lower the government liabilities for new pensions to 23% from 45% of gross domestic product,

The passage had little impact on Mexico's debt since it had already been priced in.

Instead the market is focused on the country's inability to introduce reforms to the crude oil market, which include infrastructure improvements, noted Alvarez.

Production numbers have steadily declined and while high oil prices will deliver immediate relief, investors are aware "that the medium term prognosis is in danger," he explained.

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