Emerging market debt holds on despite Treasury sell-off; Ukraine names leads for €600 million deal

By Reshmi Basu and Paul A. Harris

New York, Aug. 17 - Emerging market debt showed resilience - even while Treasuries tumbled - as the continuing search for yield helped the asset class avoid the worst of the drop in U.S. government debt.

Meanwhile in the primary market, the Republic of Ukraine named Citigroup, Deutsche Bank and UBS as lead managers for a €600 million offering of 10-year bonds (B1/BB-/BB-).

The issue is expected to be launched in September or October.

Also, the Republic of Poland (A2/BBB+) is expected to launch a $1 billion to 1.5 billion 10-year sovereign bond shortly before Sept. 25, when parliamentary elections are set to take place.

JP Morgan and Lehman Brothers are lead managers.

And Gulf International Bank BSC, an investment bank based in Bahrain, plans to sell dollar-denominated subordinated bonds.

Barclays Capital and Citigroup will be the underwriters.

Moody's Investors Service assigns its Baa1 issuer rating to Gulf International Bank. The Standard & Poor's issuer rating is A-.

EM stays firm

The producer price report in the United States showed acceleration in energy prices, which put pressure on Treasuries Wednesday. The Labor Department said early Wednesday that U.S. wholesale prices jumped 1% in July, more than expected.

By the end of the day, the yield on the 10-year notes stood at 4.27%, up from 4.22% at Tuesday's close.

But even the sell-off in the Treasuries market could not depress emerging market debt significantly.

During the session, the Brazil bond due 2040 fell 0.10 to 118.40 bid. The Philippines bond due 2025 was up 0.06 to 112.12 bid. The Venezuela bond due 2027 slipped 0.55 to 106.15 bid.

"The market hasn't moved that much in terms of price," said a sellside source.

"Colombia is tighter - between one to five basis points on the day. Mexico is somewhat mixed.

"The Peru '12...is trading very close to UMS '12, which is pretty funny since Peru is BB and Mexico is BBB," he added.

Investors were pleased when it was learned that Peru's outgoing economy minister Pedro Pablo Kuczynski would be appointed prime minister, given that he is viewed as market friendly.

"The move is appreciated by the market because they are pushing for this kind of economic policy from a higher level," said the sellside source.

"It's trading very tight.

"If we look at the fundamentals, we wouldn't be seeing these levels."

The sellside source noted that with such light trading volumes, it is pretty easy to make the assumption that the market is holding up when measured against a wider Treasuries market.

The source added that September will be true test of the market's resilience, once liquidity returns.

He also noted that Wednesday's PPI data was the first report to reveal that higher oil prices were hitting inflation.

"There's actually a pass-through on oil prices," he remarked.

"Maybe indictors will come out, supporting this story.

"And we are going to have a Treasuries sell-off, which will obviously make emerging markets fall in terms of price."

In terms of spreads, he does not see a fundamental change in many of the emerging market economies, although some countries will see higher interest rates.

Furthermore, the sellside source echoed sentiments expressed recently by several investors that the market needs to see some sort of correction. The last one occurred in March.

"I'm not saying the market should crash but it should breathe. Once we get to September, people are going to get to their desks and see the numbers and say: 'Okay, what is happening here? What has actually changed between emerging markets and the rest of the world?'"

"And to be honest, there's nothing much happening. The only thing is that emerging markets are yielding a higher level, which offers you a better return...on a buy and hold basis - which is true for some companies like insurance companies. But for hedge funds...they are going to say, 'How much do I want to stay here.'

"We should see a small correction, so we don't see a huge correction in the future. I think it's healthier."

He said that there is very real possibility that the correction may come from a factor generated within the asset class. Next year, emerging markets will see numerous uncertainties such as elections in Brazil and Mexico as well as changes in the economic picture for some countries.

"So it's like, 'Why don't we take a sit back and look at what the market is pricing in?' I don't think they are pricing in much of this information or they are actually trying hold on until the end of the year."

The source said the he does not expect to see these levels next year as the market sees more volatility in 2006.

Turkey down on Fitch report

A market source told Prospect News that Turkey's bonds were lower Wednesday morning, trailing a report that Fitch issued on Tuesday specifying that the formidable hurdles Turkey faces in its quest to join the European Union could ultimately have a negative impact on the BB- rating that Fitch assigns to the Turkish sovereign.

Turkey is scheduled to begin E.U. accession talks on Oct. 3. However in the interim, on Aug. 25, the European Council will meet to deliberate upon the legality of Turkish non-recognition of Greek Cyprus. Following that in early September, all 25 E.U. foreign ministers will meet to debate Turkey's E.U. negotiating framework, which each country must approve it for talks to go ahead on Oct. 3.

Absent Turkey's full recognition of Greek Cypress, the source said, France and/or Cyprus could veto Turkey's E.U. bid.

During the session, the Turkey bond due 2030 lost one point to 140 1/8 bid.

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