Emerging market paper dips as Treasuries decline; Brazil's new 15-year bond stays firm

By Reshmi Basu and Paul A. Harris

New York, Oct. 7 - Emerging market debt slid Thursday as U.S. Treasuries fell ahead of Friday morning's release of non-farm payroll numbers.

Fears circulated in the Treasury market that the upcoming data may show that job growth is accelerating. The 10-year Treasury note dropped for the seventh day in eight as the yield hit 4.25%.

In general, emerging market paper was softer with Treasuries.

The Brazil C bond lost a quarter of a point to 99 bid while the bond due 2040 dropped 0.55 to 112.15 bid.

Mexico's bond due 2009 fell 0.10 to 114.15 bid. The Venezuela bond due 2027 lost 0.70 to 100.10 bid while the bond due 2024 dropped 1.05 to 100.20.

Overall, the JP Morgan EMBI+ was down by 0.23%. Its spread to Treasuries tightened three basis points to 406 basis points.

Brazil, Peru: the day after

Also hurting emerging markets debt was the flood of new paper on Wednesday as Brazil and Peru priced a combined $1.8 billion equivalent of new paper.

This squeezed the market, according to a buyside source.

Brazil priced an upsized $1 billion of bonds due 2019 (B1/BB-) at 97.78 to yield 9.15% late Wednesday via Citigroup and JP Morgan.

"It wrecked the market yesterday [Wednesday] and it looks like Brazil is underperforming. It looks like Brazil is down half a point today [Thursday]," said the buyside source.

In gray market trading Wednesday, the new issue was down half a point.

"I think part of that was Treasuries. And part of it was the whole market backed up on this news.

"It's more aggressive than I'd like it for someone who is long.

"At the same time, prices have been run up for so long, you are going to have some resistance," he said.

However, in secondary trading, the 2019s outperformed the rest of the market, he commented. The bonds moved little from their issue price, trading at 97.85 bid, 98.10 offered at late afternoon.

Brazil made a wise decision to tap the market, given the current technicals, the source added.

"Anytime yields are low, it's a good time. Why would it be a bad time if you can raise 15-year money at 9.15%?"

Also, tapping the capital markets was the Republic of Peru. The country priced an upsized €650 million of 10-year bonds (Ba3/BB) at 99.658 to yield 7.55% via JP Morgan.

In secondary trading, there was sell-off of the new 2014s, according to a source.

The issue closed Thursday at 99.15, down about ½ point.

It came as a surprise to some that Peru issued new paper independent of its Paris Club debt. Another shocker was that Peru tapped the euro market instead of the dollar market.

"I think Peru went to the euro market in part because it wants to keep its options open if and when it goes to market to raise funds to pay down Paris Club debt," said an emerging market analyst.

"After the euro deal, they're now more or less finished with their 2005 borrowing requirement, apart from whatever they want to borrow to cover a Paris Club deal.

"So they probably wanted to keep the dollar market light on new supply until they can determine when and how they want to do a Paris Club deal, which presumably would entail a eurobond sale of at least $1billion.

"They will need to get another eurobond sale finished as soon as possible, though, because Paris Club amortizations will run more than $700 million per year for the next five years," he commented.

Payroll numbers' hypnotic hold

According to market consensus, 148,000 new jobs will be created in the United States in September, up 4,000 from August's figure.

"That's all anyone cares about," said the buyside source. "It's really going to tell what's going on with the Fed."

And those numbers will give emerging markets investors a clearer view on the direction of the U.S. Treasury market, he noted.

"We're going to be dragged along by that more than anything fundamental."

But the source also added that his position would not alter on that one number.

"We believe in growth. Your views evolve. You pay attention to everything.

"I don't expect to see any reason to think that tomorrow's numbers [Friday] are going to be way off one way or another.

"The interesting thing will be the revision. Are the revisions 50,000 or 1 million?

"I think that has the biggest effect on the presidential election and a big effect on the Fed," he noted.

Looking ahead, the buyside source added that he was cautious on valuation.

"Optimistic on fundamentals and interested due to relative value. We've seen all these countries upgraded in the last month.

"People are throwing around the term, the 'Latin tigers' as growth is just phenomenal in these countries," he said.

Now, there are jitters over inflation in Brazil, whereas a few months ago, the concern was that the country was heading into a recession, he noted.

"So the fundamentals are phenomenal but at the same time we are trading at near all-time high prices.

"Then if I compare it to the high-yield universe or the investment-grade universe, valuations are still compelling.

"You can earn 8½% for a BB name or you can earn 7½% for Russia. On a relative basis that's good value," he noted.

Argentina reaches deal with pension funds

The Argentine government reached an agreement with local pension funds to restructure $17 billion in defaulted debt.

"I always thought the locals were better off than the foreigners," said the buyside source.

"People's pensions matter. Banks matter. There's much more of a direct effect than if some guy in Boston gets paid his FRB coupon.

"What will be interesting will be exactly what the details are."

But there was no reaction by the market to the deal, he said.

The Argentine bond due 2008 was down a quarter to 31 bid.

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