Emerging market debt stronger on surge in U.S. Treasuries; funds sees outflows of $153.43 million

By Reshmi Basu and Paul A. Harris

New York, March 16 - Emerging market debt was pushed higher by lower U.S. Treasury yields Thursday.

In other news, emerging market mutual funds posted their first outflow for the year. Dedicated funds saw $153.43 million leave the market for the week ending March 15, according to EmergingPortfolio.com Fund Research.

In the primary sector, two sovereigns and a corporate priced deals.

Brazil reopened its bonds due 2037 (Ba3/BB/BB-) to add $500 million in a drive-by.

The reopening priced at 103.747 plus accrued interest from Jan. 18. The issue came at a spread of 204 basis points more than Treasuries or a yield of 6.831%.

The retap came as a surprise to Enrique Alvarez, Latin American debt strategist for think tank IDEAglobal.

"I don't see why they would need to do this at this time," he said.

HSBC and JP Morgan were bookrunners for the offering of Securities and Exchange Commission-registered bonds.

On Jan. 10, Brazil sold the original $1 billion of 2037 bonds at 94.856 to yield 7.557% or 295 basis points more than Treasuries - so the spread on Thursday's reopening was 81 basis points better than the original while the absolute yield was 73 basis points lower.

Also, in a drive-by, Uruguay sold an upsized offering of $500 million in 30-year global amortizing bonds (B3/B/B+) at par to yield 7 5/8%.

The deal, increased from $300 million, priced inside of guidance for a yield in the 7¾% area.

"They may be above the $500 million threshold that they were talking about per year," noted Alvarez.

"They may be trying to take advantage of the continued contained global interest rate scenario," he said, adding that it will be interesting to see how the funds are earmarked.

Citigroup and Morgan Stanley were the bookrunners for the offering of Securities and Exchange Commission-registered bonds.

And Kazakhstan's JSC Kazkommertsbank sold a €300 million offering of five-year fixed-rate bonds (Baa2/BB+) at 99.296 to yield 163 basis points over euro mid-swaps.

The issue priced at the tight end of revised price guidance of euro mid-swaps plus 163 to 165 basis points. Guidance was narrowed from initial guidance of euro mid-swaps plus 160 to 170 basis points.

ABN Amro was the bookrunner for the Regulation S transaction.

EM up on Treasuries rally

Emerging market moved higher as U.S Treasury yields saw a sharp decline. Treasuries rallied on benign readings from economic reports, which bolstered speculation that the Federal Reserve's current monetary tightening campaign was coming to a close.

The Labor Department reported that the headline consumer price index was up 0.1% in February, coming in line with expectations. The core CPI rose 0.1%, less than expectations.

Also housing starts dropped 7.9% in February, signaling that the once-hot housing market may be cooling down.

By the end of the session, the yield on the 10-year Treasury note stood at 4.64% down from Wednesday's 4.73%.

Lower Treasury yields lifted emerging markets. During the day, the Brazilian bond due 2040 added 0.60 to 131.70 bid, 131.80 offered. The Russian bond due 2030 gained 0.50 to 110.875 bid, 111.125 offered. The Venezuelan bond due 2027 moved up 1.40 to 128.50 bid, 129.75 offered.

Meanwhile the underperformer of the session was Peru whose bonds were dragged down by election uncertainty. Its bonds due 2012 lost 0.15 to 113 bid, 113.75 offered while its bond due 2015 shed 0.85 to 109.50 bid, 110.40 offered.

Alvarez said that as far as Peru is concerned he believes a "rally is a sell because the market is incredibly optimistic on something that's going to go wrong.

"The ebb and flow does create trading opportunities and obviously there are people who are looking at drops in the price to pick up some paper," he noted.

Nonetheless, the elections uncertainty has created a level of stress, and the market is overly optimistic on what the outcome will be.

Brazil up on Alckmin pick

On Tuesday, the Brazilian Social Democracy Party (PSDB) picked Sao Paolo governor Geraldo Alckmin as its presidential nominee, which is "great news," according to Alberto Bernal, fixed income analyst at Bear Stearns.

One reason behind Bernal's enthusiasm is Alckmin's position on micro-economic issues.

"In the case of Brazil, you've pretty much fixed most of the macro problems," he noted, adding that all of the necessary pieces appear to be in place, such as the country's improved inflation picture, the fiscal accounts, reduction in debt, the floating exchange rate and a nearly independent central bank.

"What is missing for Brazil to grow stronger is the 'micro'," which include a range of issues from delays on approvals on new company incorporations to shareholders rights.

Bernal noted that Alckmin has an understanding of Brazil's business environment. Investors may like president Luiz Inacio Lula da Silva. But they seem to be more excited about Alckmin.

"The guy seems to get it. In terms of ideology, Alckmin is much closer to the market than Lula is by far," Bear Stearns' Bernal observed.

And no matter how the election plays out, either scenario will be seen as favorable. However, Bernal said he is hoping that Alckmin emerges as the winner, given his market-friendly economic stance.

Nonetheless, he credits Lula for performing well and following a moderate left agenda.

"He was definitely a good surprise for most of us in the market."

Moreover, Bernal added that the market is not pricing in any volatility, which is an interesting event and in itself a new development.

"This is not something that anybody would have talked about a few years ago - the scenario in which Brazil would go into a presidential election and to not have significant foreign exchange volatility was unthinkable a couple of years ago.

"What changed that was that the left got into power in Brazil. And the left performed better than expectations," he told Prospect News.

Nonetheless Lula has the upper hand over the opposition.

"The odds favor Lula. We are in full swing of a monetary easing cycle. That will help the incumbent."

And as economics dictates, lower rates translate into lower cost of borrowings, which means lower savings, resulting in increased economic activity on increased consumption.

Furthermore, the brunt of Lula's political scandal appears to behind him.

Meanwhile, local investors are expected to adopt a different strategy leading up to the election than their international counterparts.

"I would argue that there is more probability that the locals will take a more careful attitude towards the election than the foreigners at this time if, and this is an important if, if the global liquidity scenario remains more or less the same."

Ecuador up despite strikes

Even with workers' strikes, Ecuador's paper has been rallying, which Bernal concedes may sound "paradoxical" to many investors.

"It's not necessarily a surprise. There are two parts to this story. First of all, strikes tend to be much more virulent whenever they affect the oil infrastructure. Oil is such an important component of the capacity of the government to generate resources.

"If you stop the flow of oil, everyday that passes you get a much more difficult situation. Blocking roads is very toilsome for everyone but not necessarily costly from a fiscal standpoint. That issue reduces the aggregate effects of the protests," he told Prospect News.

Meanwhile finance minister Diego Borja repeated the country's plan to call $750 million to $800 million in global bonds due 2012. Protesters have not given this issue much consideration, noted Bernal.

Protesters are talking about the free trade agreement and the Occidental Petroleum contract.

"In a way, it's good news that people are not focused on the transaction, which is the main issue for the bond market."

Borja seems to enjoy job security, which should help increase the government's probability of calling at least a meaningful amount of the bonds.

During the session, the Ecuadorian bond due 2012 was unchanged at 101.75 bid, 108.50 offered. Its bond due 2030 added 0.65 to 98.70 bid, 99.65 offered.

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