Emerging market debt a tad tighter during illiquid session

By Reshmi Basu and Paul A. Harris

New York, July 17 - Emerging market debt was slightly tighter during very thin trading Monday as the session was described as uneventful.

Escalating violence in the Middle East, coupled with the upcoming slew of economic releases in the United States, kept investors at bay, noted market sources.

However, one trader observed that the crisis did little to depress the tone in Latin America.

"Overall prices are alright today [Monday] - in fact if anything may be a little higher," he said.

Nonetheless, trading was thin throughout the region.

During the session, the bellwether Brazilian bond due 2040 was up 0.30 to 125.55 bid, 127.55 offered. The Colombian bond due 2030 was unchanged at 126 bid, 126.45 offered. The Ecuadorian bond due 2015 added 0.10 to 100.65 bid, 101.35 offered while the bond due 2030 was unchanged at 97.75 bid, 98.25 offered. The Venezuelan bond due 2027 gained 0.20 to 120.05 bid, 120/35 offered.

Elsewhere, the Philippines and Turkey saw lower prices. The Philippines bond due 2015 shed 0.12 to 108 bid, 108.75 offered while the Turkish bond due 2030 gave up 0.63 to 137.50 bid, 138 offered.

Overall, the JP Morgan EMBI-Global index tightened by two basis points on the day, eight basis points wider since last Tuesday's close, coinciding with the intensification of hostilities in the Middle East between Israel and Lebanon, according to a sellside source.

On Monday, Israel stepped up the offensive while Hezbollah militants sent rockets deeper into Israeli territory. Israel's prime minister Ehud Olmert said the attacks against Lebanon would continue until the two soldiers, who were captured by Hezbollah guerillas, were freed.

Since the start of the offensive on Wednesday, global equity markets have fallen as oil prices surged on supply worries. As a result, emerging market debt has seen some risk reduction.

However, the sellside source observed that the recent spread widening has not been a big move, at least not close to the magnitude of the sell-off seen in the U.S. stock market.

"Between what's going on in the Middle East and the economic numbers that we get tomorrow [Tuesday] and Wednesday, everybody is trying to get some idea of what the market is going to do next.

"For the time being, there is very little trading," remarked the source.

Meanwhile Tuesday will see the release of the U.S. producer price index report. The Consumer Price index will come out on Wednesday. And then on Thursday, the Federal Open Market Committee will release the minutes from its June meeting. Fed chief Ben Bernanke is slated to testify before Congress on monetary policy starting this Wednesday.

Investors are hoping that these events will shed some light on how the Federal Reserve will act next.

IIB to sell $100 million bonds

In the primary market, Russia's International Industrial Bank, via IIB Luxembourg SA (B+/B1/B), plans to sell $100 million of senior unsecured loan participation notes/

The notes will bear a tenor of up to three years and will be putable after 18-months.

Barclay Capital and Vneshtorgbank are lead managers for the Regulation S transaction.

In other news, Chile-based copper producer Corporacion Nacional del Cobre de Chile (Codelco) still has its request for proposal out there, according to the sellside source.

In its last debt offering, on Sept. 16, 2005 Codelco placed $500 million of 30-year bonds (Aa3/A) at 98.167 with a 5 5/8% coupon to yield 5.754%, or 118 basis points more than Treasuries.

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