New supply, oil concerns weigh on emerging market debt; Philippines' non-deal roadshow

By Reshmi Basu and Paul A. Harris

New York, Sept. 27 - Last week's abundant supply from Latin America coupled with escalating oil prices dampened emerging market paper Monday.

"Another down day," said Enrique Alvarez, Latin American debt strategist at think tank IDEAglobal.

"It's hard to make out the specific factors of what is going on here.

"You have a very complicated environment right now where prices have reached very tight spreads and very high levels," he said.

Furthermore, the upcoming midterm election in Brazil on Oct.3 will cool investors' appetite for Brazilian paper until it is known how president Luiz Inacio Lula da Silva's Workers' Party makes out, added Alvarez.

"Also you have some remnants of the higher inflation target [in Brazil] and supply.

"I think that is weighing down the market, he said.

Last week, the Brazilian Central Bank said it would target consumer inflation at 5.1% in 2005 in order to curb inertial inflation from 2004.

In trading Monday, Brazil's C bond was bid at 98.062, down 0.626 while the bond due 2040 fell 1.40 to 110.60 bid.

Oil and supply worries

As the market continued to digest last week's new supply and oil prices shot up to $49.74 a barrel, down came investors' appetite for Latin American paper.

"Normally, you would see a more enthusiastic reaction in Latin America for crude oil and that's not happening," said Alvarez.

Paper from oil producing countries such as Mexico, Ecuador and Venezuela traded lower.

The Mexico bond due 2008 fell 0.30 to 114.45 bid. The Ecuador bond due 2030 fell 0.10 to 81¾ bid. The Venezuela bond due 2027 lost 0.70 to 98.15 bid.

And in the case of Venezuela, new outstanding supply offset any gains from the surge in oil prices, said Alvarez.

This week, Venezuela will issue 10-year global bonds for up to $1.5 billion via Barclays Capital and Merrill Lynch.

One sell-side source says the new supply has been healthy, but the market needs time to digest it all as the recent rally appears to be winding down.

"However I think it's [new supply] totally quieting down now," said the source.

"Of course people are looking for yield, but they are also looking for something that is not going to go down right after they buy it," he added.

One of those issues that immediately traded down was the $1.5 billion 30-year bond from Mexico, which priced on Sept. 22 at 98.384.

In trading Monday, the bond was at 97 bid, 97½ offered. It was trading 210 basis points over the U.S. 30-year Treasury note, in line with its initial spread.

Also falling in secondary trading was the $1.75 billion perpetual bond issued by state-owned Petroleos Mexicanos. Pemex priced the bonds at par to yield 7¾% on Sept. 21.

It traded at 99.45 bid, 99.80 offered on Monday.

"We've had a lot of supply in September, but our price levels have still stayed very strong, even though we have obviously retraced some ground in the last few days," said the sell-side source.

"I think investors are cautious because it's hard to argue that the market continues to rally a lot from here.

"There seems to be such a split in terms of where the Fed is going.

"And the bond market does not seem to be pricing in a very aggressive Fed," added the source.

"If on the other had it turned out that the Fed does become aggressive I think the bond market would not stick up at these levels."

Who's next to issue?

Investors may still see more sovereign paper from such issuers as Turkey, Brazil and the Philippines, according to the sell-side source.

"I still think we could see some supply out of the bigger names.

"You have to be opportunistic when you see the infrequent names," said the source. "You buy them when they come as long as they are priced fairly enough. "

Meanwhile, Citigroup, JP Morgan and HSBC are hosting a non-deal roadshow for the Philippines.

"Obviously it's a non-deal roadshow although the Philippines could still look at pre-funding," the source commented.

"Their finance minister has been talking about doing something.

"But I think it's a little premature. They just did $1 billion two weeks ago," commented the source.

And the source added that Turkey still needs approximately $700 million for this year.

"There will be a big E.U. announcement on Oct. 6.

"Whether Turkey is 'go' or 'no-go' for the E.U. is critical in order for Turkey to continue to trade at the level that it is trading at," noted the source.

The Turkish parliament has now passed penal code reforms, a necessity for its E.U. negotiations to move ahead.

Oil hurts at $50

Emerging markets have been able to absorb the shock of the oil spike for now, but as U.S. equities get spooked by the rising prices, so will emerging markets, according to an emerging market analyst.

"Oil at $50 a barrel is definitely bad for risk aversion, primarily through its effects on U.S. equities," said the analyst.

"As U.S. stocks get into trouble, general risk aversion soars and emerging markets spreads inevitably have to rise.

"At current oil prices the effect on EM appears to be manageable, but further oil strength could ad fuel to today's [Monday's] spread widening," he said

Coming up, the International Monetary Fund and World Bank meetings are in Washington next week.

"We take a lot of investors down there," said the sell-side source.

"There is a seminar that begins on Friday and runs through Monday, where investors come and see all of the different issuers.

"And a lot of issuers, just because they are over here, will come and visit investors while they are here."

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