Emerging market debt flat ahead of Greenspan testimony; Argentine paper up

By Reshmi Basu and Paul A. Harris

New York, Feb. 11 - Emerging market debt finished the week with a wary tone as it closely tracked a U.S. Treasuries market. Overall, the market performance was lackluster.

As one source put it, "It's boring out there."

On the U.S. Treasury front, the market lost steam Friday in the wake of the lukewarm reception to Thursday's 10-year note auction. The yield on the 10-year note closed at 4.09% Friday from Thursday's 4.07%. On Wednesday, before the 10-year sale, the yield had dipped below 4%, closing at 3.98%.

The pullback in Treasuries coupled with inaction in the dollar did little to give emerging markets a kick, according to Enrique Alvarez, Latin America debt strategist for think tank IDEAglobal.

"It's [dollar] range bound, which is in turn keeping local currency range bound. All the action is essentially in the local equity markets, which is still marking highs. But everything else is still very quiet," remarked Alvarez.

Unable to pick up speed, emerging market trade was "flattish" Friday, with light volume, according to a sellside source.

"You've seen a little bit of a sell off in Treasuries," noted the source.

"The tone has been a little more cautious in the last few days.

"But obviously, we are holding at decent levels."

During Friday's session, the Brazil C bond added 1/8 of a point to 102¾ bid while the bond due 2040 gained 5/8 of a point to 118¼ bid.

"Trading has been moderate - more Argentina than not. Brazil has been active, but the other credits have been pretty quiet," said a trader.

Longer end outperforms

In recent sessions, the longer end of the curve has performed slightly better.

The Colombia bond due 2006 was down 1.2 points to 108.30 bid while the bond due 2033 was up 1/8 of a point to 115¾ bid. The Ecuador bond due 2012 lost 1/8 of a point to 103¼ bid while the bond due 2030 gained 0.35 to 94.60 bid.

"The curves have been very steep, so they [long-end bonds] have been outperforming because people expect some flattening in the U.S. [Treasury] curve. So they [long-end bonds] have been performing somewhat better, but I wouldn't say they are particularly sexy," remarked the trader.

In the absence of economic data, both the Treasury and emerging markets are waiting congressional testimony from Federal Reserve Chairman Alan Greenspan on Wednesday to give some much needed direction to the market.

Until then, investors are unwilling to add more risk, said the sellside source.

"People are cautious ahead of that," noted the source.

Bidders for Argentina

In recent sessions, paper from Argentina has moved up. The latest figures showed 37.2% of creditors have participated in the country's $102 billion debt swap, which ends on Feb. 25.

"What is still anyone's guess is what is going to happen to, one, institutional holders and, two, European retail holders," said Alvarez.

"We really don't know. There are a lot of voices going around that European retailers are actually selling and that it is the institutional holders that are going to take over that side.

"And ultimately, it will be them that decides the success or the actual passage of the restructuring. But it is still too early to see," he told Prospect News.

Additionally, hedge fund types along with institutions are believed to have stepped in with bids, helping push the sovereign paper up.

The Argentina FRB moved up half a point to 32¼ bid Friday. The bond due 2008 added a quarter of a point to 32¼ bid.

"After a very big tumble, you've seen it pick up."

"You have to realize that the market by rallying and by compressing spreads has essentially underpinned Argentine debt prices. Both things are having an effect there," Alvarez remarked.

VimpelCom to issue more debt

Last Monday, VimpelCom's issued $300 million 8% notes due 2010 at par. The hit and run issue was eight times oversubscribed, a market source said.

"Vimpelcom is planning to borrow an additional $1 billion this year. The company has a $400 million maturity that it needs to address this fall," said the source.

The expectation of more paper appeared to hurt the new issue in the secondary.

On Tuesday, the paper had been spotted at a 101.01 bid. On Friday, the paper fell to 100.22 bid.

"The company is about 1.4-times leveraged, so the balance sheet can carry another billion of debt without a problem, and you can look for them to opportunistically come to both the international and domestic markets.

"Also on Wednesday, Vimpelcom settled its 2001 tax bill for $17.7 million (reduced from $157 million), and is now waiting for a final decision on a $20.9 million 2002 tax claim. This is good news because it indicates that there is going to be an equitable resolution to this tax fight," said the source.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.