Emerging markets keep climbing on Friday's Treasury rally; new issue environment seen favorable

By Paul A. Harris

St. Louis, March 8 - The Treasury rally kindled last Friday on the news that the U.S. employment picture had not lived up to expectations continued to exert a positive influence on emerging markets prices during Monday's session.

And although news was scarce on the new issue front, one source advised Prospect News that in the current environment this scenario could change quickly and dramatically.

Treasury rally continues to help

A trader told Prospect News just after Monday's close that the rally sparked last Friday in U.S. Treasury paper was seen to register a meaningful and positive impact on existing emerging markets issues.

"Early today you had a lot of fast money, in trading accounts, pushing up the market," said the trader, adding that by appearances the buying was sentiment-driven.

The trader added that the JP Morgan EMBI-plus index only firmed by two basis points but on a cash basis everything was up strongly.

"That's because of the Treasury rally," said the trader. "A lot of this stuff is up, on average, somewhere around a buck and a quarter."

The source quoted Brazil's 2040 paper at 110.75 bid, 111 offered - "virtually the high of the day."

Meanwhile Brazil's C bonds were at 98.75, up 0.875.

"Even Argentina firmed," said the trader, adding that the trouble Latin American country's sovereign paper advanced 0.35-0.40 points.

Columbia's bonds due 2033 were up 1.50 and Ecuador's bonds due 2012 were up 0.75, the trader added.

"In this scenario you start to leg into duration," the source said.

"No one expects the Fed to raise rates for another 12 months, so everything is looking rosy."

Hold on to your hat in new issues

Although Monday's session produced very little news with regard to a new issue pipeline, the trader said that this could change quickly.

"I wouldn't be surprised to see issuers take advantage of the present environment," said the source. "Given these circumstances you might expect issuers to come sooner rather than later.

"With the 10-year [Treasury note] where it's at, I think people coming into today were expecting a little weakness due to profit-taking. But I've seen a new range for the low end of the Treasury yield, being 3.68%. The reason seems to be that the mortgage-related buying - the mortgage/convexity-related buying - hasn't even started yet.

"We have only had two sessions since last Friday morning's bad news with respect to the employment numbers. These things usually pan out over the course of several months. I wouldn't doubt if there is more compression here on the 10-year.

"I think that's what everyone is waiting for, so they can reissue bonds again, at the cheap.

"And it could get super-cheap. If you thought it was cheap in January, I think we're going to see things get even cheaper, going forward: 3.68% on 10-year Treasuries versus where it had been before the news Friday is a huge move."

Jobs data seen blocking rate hike

An emerging markets analyst told Prospect News during Monday's session that the weak employment figures reported Friday could perhaps allay, at least temporarily, the market's fears that a move to tighten rates by the Fed is imminent.

"There was big concern in the market that at some point this year the Fed funds rate would inch higher," said the analyst.

"With the employment data, maybe that risk is not as great as we thought it was. Maybe the U.S. economy is not going to get off the ground as much as we had once expected. In that case the Fed won't have a reason to raise interest rates anytime soon, which means that long-term interest rates should be lower not higher.

"That has a lot of EM investors thinking that if rates are going to be low for a long time, not only is there going to be a bid for yield, there is also going to be plenty of liquidity for all the EM issuers when and if they need to raise money.

"This means there should be very limited external risk for EM issuers."

Latin issuers to benefit most

The analyst told Prospect News that in a low-rate environment the countries that would benefit most would be those most sensitive to liquidity.

"Brazil is the most obvious case," said the source. "Brazil has sizable external borrowing requirements - the government, but more from Brazilian corporates. They need to borrow money this year to cover amortization payments."

If it looks like there are going be low interest rates and ample liquidity from the G7 countries, then the risk of that money not being there when Brazilian issuers have to tap the market is a lot lower, and the spread should be tighter.

"Venezuela is being positively affected more than others," added the analyst. "That's not so much because it requires liquidity, but simply because it's one of the cheapest assets out there. And because it is so cheap, in an environment where people are expecting investors to be hunting for yield, Venezuela has been a bit up."

The analyst does not look for the impact of continued low rates to be quite as dramatic on Asian paper, simply because in that case the spreads area already so low.

"It certainly should raise Asian issuers' hopes as to their ability to tap the market," the analyst commented, "especially with all the Indonesian, Indian and Korean corporate deals that will come."

Stirrings in eurobond, local markets

Although new issue news was scarce, Monday, Prospect News heard from a market source that East Line Capital SA (company ratings B3/B-) is reported to be holding investor meetings in select European cities as it gauges the market for what figures to be its debut eurobond deal.

The Isle of Man-based holding company owns a number of businesses that operate predominantly in Russia.

And in the Mexican local market Pemex (Petroleos Mexicanos), Mexico's national oil and natural gas company, is heard to be bringing a multi-tranche bond offering estimated to total approximately Ps 10 billion, via Citigroup and Santander.

"The Mexicans have huge liquidity in their banking system," a market source commented, when hearing of the deal. "They have no need to go out to the external markets to raise money."

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