Emerging market debt fails to keep up with Treasuries; more corporates join pipeline

By Reshmi Basu and Paul A. Harris

New York, Nov. 10 - Emerging market debt saw a lackluster session Friday, as the asset class digested the past week's heavy dose of new issues with relative ease.

The week saw two sovereigns tap the market. On Thursday, the Republic of Turkey priced a $750 million reopening of its 6 7/8% global bonds due 2036 (Ba3/BB-/BB-) at 93.96 to yield 7.38%.

The drive-by deal came at a spread of Treasuries plus 265.2 basis points.

Despite the new supply, the country saw its spreads tighten. But on Friday, the sovereign drifted lower.

In the secondary, the reopened bonds were spotted a tad weaker at 94.24 bid, 94.45 offered, down 0.05 for the day.

With the latest addition, the total size of the issue is $2.25 billion.

Credit Suisse and Lehman Brothers were lead managers for the Rule 144A/Regulation S reopening.

And on Tuesday, the Federative Republic of Brazil sold $1.5 billion of 10-year global bonds at 98.125 to yield 6.249%, or 159 basis points versus Treasuries, in what sources described as a "cheap deal for the country.

"The market is absorbing this stuff with no problems," observed a source, who added that it shows how much demand there is for yield.

New corporate deals

Meanwhile more corporates are set to capitalize on investors' hunger for more paper.

Adding to the pipeline, CJSC Russian Standard Bank plans to sell a dollar-denominated offering of 10-year fixed-rate notes (Ba3/B expected-).

The notes will be non-callable in five years. If the notes are not called, the coupon steps up by 150 basis points.

Citigroup and ING are joint bookrunners for the Regulation S deal.

Out of Asia, Korea National Housing Corp. (A3/A-) is planning a dollar-denominated issue of five-year floating rate notes

Deutsche Bank is the lead manager for the Rule 144A/Regulation S deal.

The Seoul-based issuer is involved in housing construction and urban redevelopment

And Kazakhstan's JSC Kazkommertsbank plans to start a roadshow for a dollar-denominated offering of 10-year bonds (Baa2/BB+/BB+) in the coming week.

The roadshow is scheduled to run from Wednesday, Nov. 15 to Monday, Nov. 20, stopping in New York, Los Angeles and London.

Credit Suisse and ING are joint bookrunners for the Rule 144A/Regulation S transaction.

The issuer is a full-service bank with headquarters in Almaty, Kazakhstan.

EM sees wider spreads

Emerging market debt was a tad softer Friday in what sources described as a slow session.

Sources noted that the debt market is stretched at current price levels, and that some of the euphoria in recent weeks has begun to wind down.

"Everyone is worried about how tight spreads are," remarked a trader.

"Overall, the tone was good today [Friday]. But we couldn't keep up with the Treasuries rally.

"It's a very sluggish market," he added.

Emerging markets trailed the U.S. Treasury market as spreads kicked out by three basis points. The market's momentum was capped by weaker U.S. equities, noted a market source.

In the absence of emerging market events or U.S. economic data, "EM just trudged along," added the source.

In trading, the benchmark Brazilian bond due 2040 gained 0.15 to 132 bid, 132.05 offered. The Mexico bond due 2026 added 0.25 to 160.25 bid, 161.25 offered. The Venezuelan bond due 2027 gave up 0.45 to 124.30 bid, 124.50 offered.

Another market source noted that emerging markets fell victim to profit taking as spreads widened marginally this week while dollar prices traded within a tight range.

Nonetheless, the asset class is expected to be range bound up until year-end. The source added that investors may try to squeeze out more juice in a year-end rally.

Given the low volatility across global markets combined with robust flows, the market will be more inclined towards tightening.

Up ahead, the coming week will see a heavy serving of U.S economic data such as the minutes from the most recent Federal Open Market Committee meeting and releases of U.S. consumer price index and producer price index data.

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