Emerging market debt holds in despite Treasury volatility; two corporates add to pipeline

By Reshmi Basu

New York, Nov. 4 - Emerging market held up relatively well, even as U.S. Treasuries whipsawed on rekindled fears of higher interest rates.

In the primary market, two corporates added to the pipeline. State-owned OJSC Russian Agricultural Bank (Rosselkhozbank) plans to start a roadshow for a dollar-denominated bond offering (Baa2//BBB-) from Nov. 10 to Nov.16.

ABN Amro and Dresdner Kleinwort Wasserstein are joint bookrunners for the Regulation S transaction.

And Banco Continental de Panama SA plans to issue $150 million of five-year bonds (/BBB-/BBB- expected).

Citigroup is running the Rule 144A/Regulation S transaction.

During the session, the Panama bond due 2012 was spotted down a quarter of a point to 115¼ bid, 116¼ offered.

EM holds in, despite volatile Treasuries

Emerging market debt saw lower prices Friday as Treasury yields neared the year's high in response to employment data. The Labor Department reported that U.S. non-farm payrolls rose by 56,000 in October, falling far short of the consensus number of 102,000.

Initially Treasury yields fell in reaction to the headline. But then there was a turnaround when closer analysis of the report revealed a large gain in hourly average wages. Wages jumped 0.8 cents to $16.20, the highest monthly increase since February 2003. That news once again raised speculation that the Federal Reserve would continue to raise interest rates.

The yield on the 10-year note stabbed 4.70% before closing at 4.67%, up from Thursday's 4.65%. So far this year, the high was 4.68%, which occurred on March 23.

Weaker and volatile Treasuries pressured emerging markets, according to market sources.

Earlier in the session, emerging market debt moved up in response to the jobs numbers, said a market source, who added that gain was short-lived, cut off by the Treasury volatility.

"The momentum we had from Thursday is lost," said a market source, who added that investors are pricing in higher Treasury yields heading into the coming week.

During the session, the spread in the JP Morgan EMBI+ Index widened by one basis point to 251 basis points. But Brazil outperformed the market.

"Our market held up very well today [Friday]," added the trader.

"Everything got hit in the morning.

"Then we took another run at the lows later on the day when Treasuries sold off.

"Ultimately there wasn't that follow-through supply that the Street saw," the trader remarked, adding that the spread on the Brazil bond due 2040 tightened three to four basis points on the day.

He added that it "was a pretty nice move, considering that Treasuries were going out yet again on their lows."

During the session, the Brazil bond due 2040 added 0.15 to 119.60 bid, 119¾ offered.

Meanwhile, as Brazil outperformed the market, there were rumors that Brazil would retap an existing bond or issue local-currency denominated paper in the coming weeks.

A source added that talk of new paper lost some speed towards the end of the session.

Other credits traded lower during the session. The Ecuador bond due 2030 lost one point to 88½ bid, 89 offered. The Mexico bond due 2026 slipped two points to 157.20 bid, 158 offered. The Venezuela bond due 2027 fell 0.20 to 117 bid, 117.30 offered.

Even Peru traded lower despite Fitch revising its outlook on the sovereign rating to positive from stable.

The Peru bond due 2015 lost a quarter of a point to 122½ bid while the bond due 2016 lost half a point to 112 bid. Meanwhile the bond due 2012 added a quarter of a point to 115 bid.

Nonetheless, the market source added that it was premature to assess the market's strength, given how illiquid the market is.

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