Emerging market debt aimless ahead of U.S. economic data; Tenaga sells $350 million 10-year notes

By Reshmi Basu and Paul A. Harris

New York, April 27 - Emerging market debt traded without focus Wednesday, as investors looked ahead to vital economic data in the United States for clues as to the health of the economy.

Meanwhile in the primary market, Tenaga Nasional Malaysia Bhd. priced $350 million of 5¼% 10-year senior unsecured notes (Baa2/BBB) at 99.05 for a spread of mid-swaps plus 70 basis points.

"If you look at recent transactions like Indonesia, which just blew up after pricing, this transaction went very well," said an informed source.

On April 13, the Republic of Indonesia priced $1 billion of 10-year bonds (B2/B+/BB-) at 99.127 to yield 7 3/8%. The bonds immediately plunged in the secondary.

The source also added that the new issue from Tenaga saw "a lot of high quality accounts from Asia and the U.S. in the book, with a little less interest out of Europe.

"People were fine on the price, even in this market," said the source.

The source noted that the deal traded well in the secondary and is "an exception to the rule."

"Emerging markets represents such a broad range of credit and ratings. This is a triple-B rated integrated electric company. It will probably go better than a lot of deals would right now."

Barclays Capital, CIMB Bhd. and Credit Suisse First Boston ran the books for the Rule 144A/Regulation S issue.

EM trade barely there

Otherwise trading volume was light Wednesday as Brazil and Venezuela saw some flows but not much, according to a Latin America debt strategist at Refco EM.

The strategist said that U.S. Treasuries rallied earlier in the session when the Commerce Department reported an unexpected drop in March durable goods orders. The figure fell 2.8% in its the third consecutive monthly decline.

"You had the report on orders in the U.S. - a very negative report which set a very bad tone at the beginning of the day on equities and gave support to the Treasury market.

"And emerging markets, at the opening, was trading with Treasuries," he commented.

"By mid-day, the report on oil inventory, which was better than expected, set Treasuries lower and also emerging markets traded a little bit weaker on that," he said.

The U.S. Energy Information Administration reported U.S. crude stocks rose 5.5 million barrels last week to 324.4 million, the 10th rise in the last 11 weeks. This propelled a price drop in oil, which fell $2.59 to $51.61 a barrel.

By the end of the session, the Brazil C bond was unchanged at 99¾ bid while the bond due 2040 rose 0.05 to 113¾ bid. The Mexico bond due 2009 was down 0.10 to 118.30 bid. The Venezuela bond due 2027 lost a quarter of a point to 98¾ bid.

The strategist said the market was further stalled by a decision by the 2nd U.S. Circuit Court of Appeals in New York to adjourn before ruling on an investor's request to freeze $7 billion of old bonds tendered for new debt as part of Argentina's $104 billion debt restructuring.

Argentina was to issue $35.3 billion in bonds in exchange for $62.3 billion in old defaulted bonds on April 1.

Standby mood, says research head

This week, emerging market debt is trading sideways as the market looks to re-price for either higher inflation or growth.

"Investors are trying to discern whether or not that is the new scenario," said Alberto Bernal, head of Latin America research for think tank IDEAglobal.

"We all know that inflation has increased but we do not know if or when the whole situation will continue, especially if oil prices fall. And we don't know if the U.S. economy is really rebounding, or if it is de-accelerating or if what we are seeing is another soft patch in an otherwise very bullish."

On Wednesday, Prospect News spoke to Bernal for insight into how to play the Latin America region.

"People are basically in a standby mood," said Bernal.

Bernal said that market participants will read the next round of key economic data such as Thursday's release of GDP to gage where U.S. interest rates are heading in the medium term.

One reason why the market is directionless is because of conflicting economic reports, giving investors a migraine as they sift through inconsistent data, said Bernal.

"Some releases are good. Some releases are mediocre. Some releases are downright bad. There's not a consensus on whether the U.S. economy is accelerating, de-accelerating or just cruising along."

Recently, emerging market debt has been trading with equities lately, as it decouples from U.S. Treasuries, said sources.

"It is another driver of this multiple equilibrium exercise but it is an important one because the U.S. equity index is the best indicator that you have, perhaps outside of gold, of risk aversion," remarked Bernal.

"If the equity markets collapse, people are going to talk about increased risk aversion and risks of the economy not doing well. Therefore, they tend to go into Treasuries, so rates go further down but for the wrong reasons," Bernal told Prospect News.

Under a pure risk aversion scenario, emerging markets should get hit because even though U.S. rates would go down, the Latin America region does not have too much credibility to assure investors that nothing bad is going to happen in those economies, he commented.

"So people tend to sell Brazil, Colombia and Mexico, when there is increased risk aversion, despite interest rates going down in the U.S."

The market is still very focused on the external story because the local fundamentals tend to be good in the bellwether countries, he added.

Countries such as Brazil, Mexico and Peru are doing well, he noted.

"All the local fundamentals such as exports, current accounts, commodity prices, all these things that tend to matter for the fundamental story in the region, are still doing very good.

"The sole focus of market participants at this time tends to be now the performance of the U.S. equity market and the U.S. Treasury market," Bernal responded.

Bernal does not recommend that investors buy Ecuador on weakness. He said that the new government would not be as fiscally responsible as the prior administration. And the new finance minister is not Wall Street darling Mauricio Yepez.

Even if there is ratification from the Organization of American States of the Palacios administration, the situation is very fluid, said Bernal.

Last week, Ecuador's prices were ht by the ouster of president Lucio Gutierrez. The market was further spooked by comments made by his replacement Alfredo Palacios, who has suggested earmarking more of the oil stabilization funds for social spending.

The new economic minister Rafael Correa has also said he wants to redirect funds for social programs.

During Wednesday's session, the Ecuador bond due 2012 gained 0.10 to 92¾ bid while the bond due 2030 fell one point to 79 bid.

"We are very bearish," Bernal said. "We think this is not the end of the story. We are very unlikely to see increased investment in Ecuador because structural reforms will not take place."

"We think this is an evolving story. And we are recommending to sell on strength because we think that this thing will continue to deteriorate."

Bernal recommends market weight in Brazil because of its positive fundamental story.

"The problem is that since this is the benchmark of the Latam region, this will be the one that will give direction to the other credits, so the volatility will be higher.

IDEAglobal's Bernal said that he does not recommend overweight because of the conflicting data over the future direction of interest rates.

"We are not overweight because of external issues, even though we are quite positive on the local fundamentals. We recognize that the credit will continue to be driven by the external markets."

And in Mexico, Bernal recommends overweight in Mexico, despite the political turmoil between president Vicente Fox and Mexico City's mayor Lopez Obrador. The country is investment-grade and is tied to the U.S. economy, which gives it some cushion, he said.

The popular Obrador is facing charges that he ignored a 2001 court order to stop building a hospital access road on private land. The charges could cost him a chance at a presidential run. But Obrador's side says the charges are a politically motivated attempt to keep him out of the election.

"We think that the country is in a much better position today to resist any kind of political instability that may be forthcoming," noted Bernal.

Bernal is also overweight in Venezuela, "despite the fact that we have a terrible medium-term and long-term view regarding the fate of the country."

Given that oil prices are likely to remain supported, cash flow should remain positive in the short- to medium-run, commented Bernal.

"We still think from the perspective of capacity and willingness to pay their debts, there is absolutely no question at this time."

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