Emerging market debt holds onto gains in light activity; Asia's thin trading

By Reshmi Basu and Paul A. Harris

New York, May 27 - Emerging market debt held onto its recent advance Friday in light action ahead of the long U.S. Memorial Day weekend.

Trading was firm during an illiquid session, as the debt market ended the week on a rallying note, said a source.

In a truncated session, the Brazil C bond moved up 0.12 to 101.87 bid while the bond due 2040 added 0.15 to 118.20 bid. The Mexico bond due 2009 was unchanged at 119.30 bid. The Russia bond due 2030 rose 1/8 of a point to 109 1/8 bid. The Venezuela bond due 2027 gained 0.15 to 99.35 bid.

Turkey's bonds traded higher ahead of the May 29 vote. That day the French will decide for or against the E.U. constitution in a referendum. The Turkey bond due 2030 was up 1.055 to 137.93 bid.

Meanwhile the firmness across Latin America is prompting one investor to unload some of her Brazilian corporates.

"I've noticed incredible strength in Latin corporates and sovereigns while Asian corporates and U.S. corporates traded off a lot," said Pax World High Yield Fund portfolio manager Diane Keefe.

"So I've been lightening up on my Brazilian corporates."

The current Latin American rally is based on Brazil - in particular, its strength in the basic materials commodities segments, she said.

"Its macro economy is driven by its supplier relationships to China. The robustness of that is considered to be such an advantage that people are thinking that the sovereign is going to get upgraded.

"That's fine. But when you can sell a Brazilian corporate and go into a double-B rated U.S. high yield company for close to an even yield. I'm going to do that all day long," she remarked.

Asian trading light

Meanwhile, Asian names were up amid broad-based demand although activity was thin, according to a market source. The source added that at the close of Asian trading on Friday, high-grade names were tighter by two to three basis points. And high-yield names were slightly higher.

Indonesia's sovereign bonds outperformed, up ½ point on strong local demand.

During Friday's session in the United States, there was a good bid for Asian names, according to a trader. The Philippines is one credit having a strong rally, he added.

He noted that the Philippines bond due 2025 fell eight dollar points in March. The security is now within two dollar points of where it was at before that decline.

"They have rallied four points in the last 10 trading sessions," remarked the trader.

"For one thing, risk premiums in general are decreasing. So people who were afraid to get in the water are somewhere between toe-deep and neck-deep. They're looking for anything flagged or anything under-rated by the agencies," he said.

After a year of numerous negative headlines for the country, the tide may be changing, according to the trader. He said that for the first time in at least a year, there are two positive fundamental developments.

"The most significant one is that Fitch changed the rating outlook Thursday from negative to stable, and leaves them at double-B. That's very significant for a couple of reasons.

"One is that they have implemented an inordinate amount of fiscal reform measures.

"But the consensus of the market was that these measures were all watered down, and basically all showing no dough.

"As it turns out, after Fitch did some tire-kicking on these things they found some meat there. So there is a sea change occurring in the mindset of investors that the Philippines is not the next Argentina. It's not going to blow up," he remarked, adding that finally its paper is at least fairly valued.

And in comparison to other high single-B or low double-B credits, the securities look pretty attractive, he observed.

"That brought in an inordinate amount of real money buying," he added.

"Since the March decline all of these little transitory rallies that we have had have been dominated by trading accounts. What makes this one different, besides the magnitude of the price increases, is that trading accounts have not been involved. You have seen real-money investors - insurance companies, pension funds, total-rate-of-return investors - coming and waving in $5 million, $10 million, $20 million a pop.

"It feels like this is more of a corrective move than these bear market rallies that we have seen since the March sell-off. The magnitude of the price change pretty much assures that," he commented.

Asian pipeline

The trader added that the market is being hush-hush about giving up names of potential Asian issuers but it sounds like Indonesia may be tapping the 2015 sovereign.

"New issues have been coming pretty well. Everyone wants to get involved, on the cheap," he said.

"They've priced the deals cheap. They've come at decent concessions to the secondary, so people are not flipping them.

"The NACF deal and the Korea Highway deal have been characterized by very solid books. You saw the same thing in the $750 million Philippine re-tap," he observed.

"There are very few bonds coming out in the secondary even though they priced it really cheap."

In the pipeline are issuers such as LG Electronics, Hanaro Telecom, PT Inco, Indosat, Bank Negara and Bank Mandiri.

"The calendar in Asia, right now, is just bursting at the seams. There is going to be a lot of supply in Asia over the next month, market conditions permitting," remarked the trader.

Belize to restructure commercial debt

Late Thursday night, the government of Belize issued a press release stating that the country will undergo a significant fiscal adjustment this year.

An analyst estimated that the fiscal adjustment amounts to about 3% of GDP.

Most important to bondholders is the government's stated plan to restructure its commercial debt, according to the analyst note.

The press release implies that the debt restructuring will be market friendly and will include the extension of maturities, said the analyst.

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