Emerging market debt ends three-day sell-off on U.S. job numbers; Vicunha's bond sale on hold

By Reshmi Basu and Paul A. Harris

New York, Oct. 7 - Emerging market debt rebounded in an abbreviated session Friday, responding to better than expected non-farm payroll numbers in the United States.

"The market is well-bid today [Friday]," said a trader. "Spreads are about seven tighter."

In primary news, the recent sell-off in emerging markets prompted Brazil's Vicunha Acos SA/National Steel SA to place its up to $500 million offering of perpetual senior secured notes on hold, a market source told Prospect News on Friday.

Earlier in the week the notes had been talked at a yield in the 9 7/8% area.

The roadshow had been scheduled to wrap up on Thursday, Sept. 6.

Credit Suisse First Boston and Deutsche Bank Securities are joint bookrunners for the Regulation S-only offering.

EM recovers

The previous three sessions saw spreads widen as risk aversion entered the market, triggered by inflation concerns as well as by the direction of interest rates and by oil prices.

Emerging markets moved more substantially than other markets during the week, and there was more pressure in local markets than in the external markets. Brazil and Russia were off a fair amount, said a sellside source.

But the market was better on Friday, the source said, adding that the Brazil bond due 2040 moved up, inter-day, over 123.0 bid.

The security had been down as low as the low 118s, and mid-Friday morning they were at 119.90 bid.

The source added that the asset class came back a fair degree Friday after hitting its lows early Thursday afternoon, a decline he believed was just driven by peoples' concerns about rates, which motivated them to consider taking some profit.

"Once people saw the payroll numbers Friday morning they decided that the world had not ended, and got back into some of the stuff they had been selling early in the week," the source added.

Non-farm payrolls fell by an estimated 35,000 in September, the first decline in two years, the Labor Department reported. But that number came far short of the expected 150,000 jobs lost, as predicted by economists.

Those numbers gave some relief to investors that the U.S. economy was not entering a slowdown as feared.

Sell-off needed

A market source said the recent sell-off was needed, given the stretched valuations in the market. Excluding Friday's session, the JP Morgan EMBI Global index has widened by 26 basis points in the first week of October after tightening 46 basis points in September.

Moving ahead, there may be further spread tightening with spreads for the EMBI Global Index trading between 225 to 250 basis points by the end of the year, said the source.

Concerns on the macroeconomic front are increasing, but with high commodity prices and inflows expected to be positive, the market should grind tighter.

But the source added that investors should be mindful of Treasuries. Spreads are still tight even with the recent correction and U.S. Treasury yields have marked a higher territory.

Now U.S. Treasury yields make up a bigger proportion of overall yields, and therefore are a greater driver when it comes to risk. As evidence, September's impressive rally on a spread basis only saw a 1.7% return for the EMBI Global because of Treasuries' softness.

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