Emerging market debt firm as Treasuries gain; Turkey sells €750 million 10-year bonds

By Reshmi Basu and Paul A. Harris

New York, Feb. 17- Emerging market debt traded was firm Friday, but lagged a little behind a rally in U.S. Treasuries.

In the primary market, the Republic of Turkey priced a €750 million issue of 10-year eurobonds (Ba3/BB-) at 99.615 to yield 5.05%.

The yield came on top of the price talk.

Credit Suisse, DZ Bank and UBS were the bookrunners for the Regulation S deal.

EM trades flat

On a spread basis, emerging market debt was flat to slightly wider, as the asset class more or less tracked U.S. Treasuries.

The debt market saw mild flows in an abbreviated session ahead of the holiday weekend in the United States.

"We had a pretty good day today [Friday], despite the fact that it was a short day," remarked a buyside source.

"It was really quiet."

During the session, the Brazilian bond due 2040 added 0.70 to 132.80 bid, 132.90 offered. The Russian bond due 2030 gained 0.44 to 112 bid, 112.438 offered. The Venezuelan bond due 2027 moved up 0.15 to 126.20 bid, 126.50 offered.

In other news, reports of bird flu cases surfaced Friday in Egypt and France. The market showed little response to the headlines, according to the buyside source.

Reaction to the outbreak has since died down, following January's outbreak in Turkey when the avian flu claimed two lives and infected at least 16 others

"There was really no reaction, not even in the Turkish markets," replied the source.

"I don't think the market is focusing on that right now."

Strong market technicals

In 2006 sovereigns were expected to issue $52.9 billion to meet their financing needs, so far this year $27.4 billion has already been completed, according to an analyst note.

Investors are not surprised by how quiet the pipeline is now considering that countries such as Brazil, Turkey, Philippines have already issued on the long end this year.

The analyst note said that a comparison of the financing needs of 15 major EM issuers against their remaining coupon payments and amortizations shows only six countries have any financing to do this year. Those countries are Indonesia, Lebanon, Malaysia, Philippines, Turkey and Ukraine.

Technicals in the market were already positive, but then throw liability management into the mix, and the technicals gain even more steam.

"We're still holding on the our external debt positions because the technical bid is going to be very strong if there is no issuance and if sovereigns are buying back their debt as Brazil is," remarked the buyside source, referring to the Brazilian treasury's announcement on Feb. that it would buy back up to $20 billion of external debt.

"As the market sees the tight spreads in the dollar-pay market, more and more people are going to look at the local market," noted the source.

Furthermore, countries are preparing for such a trend. On Thursday, capital markets were pleased with the Brazilian government's decision to eliminate a 15% withholding tax on income and capital gains in local-currency government debt for foreign investors.

"That's a positive step. It doesn't get us there full way because they still have the CPMF tax [provisional contribution on financial transactions].

"It certainly shows that the whole market, both issuers and investors, are looking at local markets as the next step from here," observed the buyside source.

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