Emerging market sees firmer tone on unsurprising FOMC minutes, Braskem sells $150 million bonds

By Reshmi Basu and Paul A. Harris

New York, May 24 - Emerging market debt carried a firmer tone Tuesday, as minutes from the Federal Open Market Committee packed no punches. The debt market also overlooked a second ratings downgrade to junk for General Motors Corp.

"Things are firmer," said a trader. "The market just doesn't want to die.

"When everyone is so negative, that's when thing are always positive."

Meanwhile, in the primary market, Brazil's Braskem SA priced $150 million of 10-year notes (/BB-/BB-) at 99.522 to yield 9.45%.

The oversubscribed deal priced at the tight end of revised price guidance. Guidance had been tightened to 9.45% to 9½% from initial guidance of 9 5/8%.

A sellside source said the deal was done very well, even after talk was tightened from initial guidance.

The final book size stood at $725 million, according to a market source.

"It's a name that people like now," said the sellside source.

"It's a name that really transformed itself. They really reduced leverage. They have consolidated the sector a lot. It's a much more logical story than it was before."

The new credit traded higher in the secondary market, according to a Brazilian corporate analyst.

The bonds were spotted at 101 bid, 101½ offered.

ABN Amro and Citigroup ran the Rule 144A/Regulation S offering.

Also out of Brazil, Banco Bradesco SA talked its $250 million offering of perpetual tier I notes at 9% to 9¼%.

The roadshow is expected to wrap up on Wednesday in Asia, according to one source, who added that the deal is primarily targeted to Asian retail investors.

Merrill Lynch & Co. has the books.

And in Asia, China Overseas Land & Investment Ltd. talked its $300 million offering of 10-year notes (Baa3/BBB-) at U.S. Treasuries plus 180 basis points.

Pricing is expected on Thursday.

HSBC and JP Morgan are leading the Regulation S transaction.

FOMC minutes turn into non-event

Minutes from the FOMC's May 3 meeting carried no surprises, according to sources, as investors remained upbeat that the Federal Reserve would continue raising U.S. rates at a measured pace.

"The major event of the day, the FOMC minutes, turned out to be a non-event essentially," said Enrique Alvarez, Latin America debt strategist for think tank IDEAglobal.

The Fed minutes showed that policymakers viewed recent soft economic data as "transitory" but they remained concerned over growing inflationary pressures in the United States.

"Core measures of price inflation had moved up over recent quarters and particularly so over the last few months," the FOMC said.

Alvarez said that the minutes took note of mortgages and the overheating in the U.S. real estate market.

"But no real worries or real alarms were touched off by the FOMC, so steady as she goes in that sense," said Alvarez.

"I think Treasuries are essentially portraying the same thing."

Yields on U.S Treasuries fell in response to the minutes. The yield on the 10-year note stood at 4.03% at the end of the session, down from Monday's 4.07%.

However, Alvarez said that Latin American debt was tracking equities.

"Latam is very much glued to what the equity market is doing. If you construct a relationship, you can see that is essentially what guided prices today [Tuesday]," he added.

During Tuesday's session, the Brazil C bond was up a quarter of a point to 101 3/8 bid while the bond due 2040 added 0.85 to 116.85 bid.

Little move as Fitch cuts GM to junk

Fitch Ratings became the second ratings agency to cut General Motors to junk but the news had little impact on emerging markets trading Tuesday.

The sellside source remarked that Fitch's downgrade did not cause as much volatility as when Standard & Poor's cut the automaker's rating.

The source added that autos fell off as much as four points initially, but came back quite a bit on the day.

Emerging market debt is up on the day, remarked the source.

"Mexico was trading, on a spread basis around 152/153 when the downgrade happened. It went out to 155, and ended at 149.

"In general emerging markets is a lot tighter than it was before the news."

Alvarez added there were apparently no ripples on the credit derivative side from the downgrade.

"It seems like the situation was totally discounted. At least, it seems to be very quiet, which is essentially the same thing that happened in EM, he noted.

"EM focused more on the Fed at this point."

But Alvarez cautioned that the GM news might still play spoiler for the credit markets, whether it be how the market reacts to indexes removing the company or if the market gives way to another rumor of a hedge fund's exposure to the automakers.

"At least in the meantime, it seems it was a given in the market," he replied.

The trader credited emerging markets' recent stability to a firm U.S. Treasuries market and the "fact that all the other credit markets are rebounding after all the negative, negative, negatives."

"They managed to go higher, so this whole hedge fund thing seems to have passed for the time being.

"And people are covering shorts and the market has gone back the other way," he added.

Too much liquidity, says trader

Furthermore, the trader added that the problem with emerging markets is that there is too much money.

"There's still too much liquidity - that's why spreads are the way they are, so no money has been sidelined here.

"People have been forced to participate at tighter and tighter levels."

With spreads so tight, many emerging market investors have been hoping for some sort of correction. For that to happen, the market would need a lot people to short it, but there doesn't seem to be too many shorts out there.

"I think that with UST rates where they are, EM external debt will continue to find plenty of interest from the same investors who have been hungry for yield for the last two years," said an emerging market analyst.

"It's tough to short this market when you know that there is plenty of money lined up on the sidelines waiting for a correction to add even more exposure.

"For that reason, I think you would have to see some much more serious exogenous shock to really break the back of EM in the short-term.

"Over the medium-term, though, EM fundamentals are going to deteriorate to some degree, which I think would make it easier to sell this market. That probably won't become apparent until later this summer, though," he added.

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