Emerging market debt supported by Treasuries rally; issuers sell $900 million of new debt

By Reshmi Basu and Paul A. Harris

New York, Nov. 8 - Emerging market debt recorded another positive session on the back of a rally in U.S. Treasuries and a positive outlook on Brazil's rating by Standard & Poor's.

In the primary market, emerging markets saw $900 million of new bonds Tuesday, as Colombia and the Export-Import Bank of Korea tapped the capital markets.

In a drive-by, the Republic of Colombia sold $400 of 10-year floating-rate notes (Ba2/BB) at par to yield three-month Libor plus 180 basis points.

JP Morgan was the bookrunner for the offering of Securities and Exchange Commission registered notes.

Also, Kexim priced $500 million of five-year floating-rate notes (A3/A/A-) at par to yield 24 basis points more than three-month Libor.

Credit Suisse First Boston, HSBC and UBS Investment Bank managed the sale.

EM has positive session

Emerging markets tracked a winning U.S. Treasuries market Tuesday, as the federal government embarked on its quarterly refunding, which entails a three-day auction of $44 billion in new paper.

During the session, the Treasury sold $18 billion in three-year notes at 4.458%. The good news was that there was solid demand. But the bad news was that indirect bidders, which included foreign central banks, showed little interest.

Nonetheless, Treasuries gained for the second session. The yield on the 10-year note stood at 4.56% from 4.64% on Monday.

Emerging markets kept pace with the strength in Treasuries, remarked a sellside source.

"On a spread basis, we're all over the map," said the source, adding that the higher grade off-the-run credits lagged but on-the-run names performed well.

"Brazil is sort of unchanged [spread-wise] so it really held up with Treasuries," noted the sellside source.

The country also received a headline boost when Standard & Poor's upgraded the outlook of Brazil to positive, according to a market source, adding that the momentum should continue.

However, the news may have been a let down, given that many market participants were holding out for an upgrade in the rating and not in the outlook. Moreover, the move puts S&P in line with other ratings agencies, which could mean that a rating upgrade may come later than sooner, noted the source.

In late trade, the Brazil bond due 2040 was quoted up three-quarters of a point to 120.80 bid, 120.90 offered. The sovereign's portion of the JP Morgan EMBI Global Diversified was by 0.4% while its spread over Treasuries narrowed by one basis point.

During the session, the EMBI Global Diversified index rose 0.5% while its spread over Treasuries widened by one basis point. Argentina, Uruguay and Panama saw returns of 0.8%, 1.2% and 1% respectively, said a source.

EM buoyed by cash

Overall, the tone in the asset class is good, but there is a potential for increased volatility, remarked the sellside source.

"People may actually become more concerned as Treasuries get too tight, 'cause it means that you have more room to move again."

Moreover, the source noted that those investors who are sitting on cash are being cautious.

But that cash is giving the market its resilience, replied the sellside source.

"Fundamentals in our market are still good. The things that are concerning our market are outside our market."

The source also added that one reason why the asset class is feeling constructive is because the amount of new paper coming in the market is expected to be low.

Looking ahead, the sellside source expects emerging markets to trade in tight ranges as long as there are no surprises in the U.S. Treasury auction.

On Wednesday, the government will auction $13 billion of five-year notes and another $13 billion in 10-years on Thursday.

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