Emerging market debt lower after Friday morning's bullish run; Kazkommertsbank prices

By Reshmi Basu and Paul A. Harris

New York, Oct. 22 -Investors came out swinging Friday morning, which gave a lift to emerging market paper early, but eventually the session succumbed to a sell-off.

"Trading was very active in the morning," said a trader. "And now extremely quiet," he said at late afternoon Friday.

"We started off bullish with buyers, buyers, buyers.

"And as soon as the buyers stopped, the market sagged. And we are probably at the lows of the day and things are very quiet," he commented.

Hypnotized by climbing energy costs, U.S. Treasuries rallied as oil prices passed $55 a barrel. Treasuries erased early losses and the yield on the 10-year benchmark note fell to 3.98% from last Friday's 4.06%.

"Prices were off with the Treasuries' rally this week," said a second trader.

"But then there's also been a lot of new paper this week too.

"Equities are getting rattled. There's some uncertainty out there, that's affecting the mood of the market."

Oil closed at $55.17 on the New York Mercantile Exchange, up $1.20 for the week.

By the end of Friday's session, Brazilian paper was down. The Brazil C-bond lost 3/8 to 98½ bid while the bond due 2040 was bid at 111, down 0.85.

Russia's bond due 2030 was unchanged at 99¾ bid while Venezuela's bond due 2034 was down 0.85 to 101.60 bid.

On Thursday, there was a brief rally after the market endured a correction in the preceding sessions.

But it is tough to say whether or not emerging market debt is out of the woods, according to the first trader.

"It seems like we are making higher lows," the trader said. "If you look on the graph, we have an uptrend even though the market remains volatile.

"We'll know better on Monday and Tuesday," he noted.

Kazkommertsbank sells upsized deal

In primary action, Kazkommertsbank priced an upsized $350 million of five-year fixed-rate notes (Baa2/BB-/BB-) at 98.967 to yield 7¼% or Treasuries plus 395 basis points via ING and UBS.

The deal was increased to $350 million from $300 million.

Kazkommertsbank is one of three largest banks in Kazakstan.

China's slam-dunk

The People's Republic of China priced $1.7 billion equivalent of bonds in two tranches Thursday. The sovereign priced €1 billion of 10-year bonds at 98.926 to yield 40 basis points more than mid-swaps and $500 million of five-year notes at 99.603 to yield Treasuries plus 60 basis points

"The timing was good, given how tight the pricing was," said a market source. "Sort of lucky that Treasuries were falling below 4%."

The first trader said China's dollar bonds were trading at 59 bps bid, 57 bps offered in the secondary market, "so it's trading pretty strong."

Mexico raises rates

Mexico's Central Bank tightened monetary policy, lifting its liquidity requirement to 57 million pesos from 51 million pesos in order to rein in inflation fueled by higher commodity prices.

The Corto hike is the seventh tightening this year.

The Mexico bond due 2008 fell ¼ to 114½ bid. The bond due 2016 was down 0.050 to 148¼ bid. The bond due 2026 added ¼ to 151¼ bid.

In further news out of Brazil, the government announced that the country's unemployment rate dropped to 10.9% from 11.4% in the country's six biggest cities.

In another report, the consumer price index IPCA-15 slid to 0.32% from 0.33% in September.

And looking ahead, investors will anxiously await the release of minutes from last week's Copom meeting, slated for Thursday.

"I think people will be looking for clues as to why the bank raised rates by more than what the market had expected, especially given all the rumors that Lula's government was putting pressure on the bank to do nothing," said the market source.

The Central Bank surprised the market Wednesday night by raising its benchmark Selic rate by half a point to 16.75%. The market had expected a quarter point hike.

Latin American corporates down

Brazilian corporate bonds traded lower for the week.

Beverage producer and distributor AmBev's bond due 2011 was at 122¾ bid, 123¾ offered on Friday, down ¼ from Monday's 123 bid, 124 offered.

Steelmaker Companhia Siderurgica Nacional's bond due 2008 was bid at 1111/4, 1121/4, down half a point from Monday's 111¾ bid, 112¾ offered.

And oil giant Petrobras bond's due 2013 was bid at 109, 110 offered, down ¼ from Monday's 109¼ bid, 110¼ offered.

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