Emerging market debt rides higher as U.S. equities tops record-high; Uruguay, Turkey retap

By Reshmi Basu and Paul A. Harris

New York, Oct. 19 - Emerging market debt clocked in another solid session as U.S. stocks closed at a new record-high.

Meanwhile the primary market was in full force Thursday, as two sovereigns reopened their global bonds.

And the market appeared ready and able to digest the new issuance as the JP Morgan EMBI Global index tightened by three basis points.

First off, the Republic of Uruguay reopened its bonds due 2036 (B3/B+/B+) to add $500 million.

The deal priced at 101.226 to yield 7.52%.

Citigroup, JP Morgan and UBS were joint bookrunners.

Also on Thursday, the country retapped its local currency inflation-linked bonds due 2018 to add $300 million equivalent in a Regulation S deal via Citigroup.

In the morning, the country announced that it would buy back as much as $2.2 billion of its global bonds. Proceeds from Thursday's sale will be used to pay those bondholders who opt for a cash payment.

Amid all the activity, Uruguay saw a solid performance as it spreads tightened by four basis points.

Next the Republic of Turkey reopened its global bond due 2025 (Ba3/BB-/BB-) to add $1.25 billion. The deal priced at 99¾ to yield 7.398%. That came at the cheap end of price talk, which was set at 99¾ to 99 7/8.

JP Morgan and Merrill Lynch were lead managers for the sale.

The retap brings the total size of the deal to $2 billion.

In the secondary, Turkey also performed well as its spreads also tightened by four basis points.

Meanwhile two corporates priced deals.

Out of Chile, Corporacion Nacional de Cobre de Chile (Codelco) sold a $500 million offering of 30-year senior fixed-rate bonds (Aa3/A) at 99.296 to yield Treasuries plus 128 basis points.

Deutsche Bank and HSBC were lead managers for the Rule 144A/Regulation S transaction.

And Petrol AD (Bulgaria) sold a €100 million offering of five-year notes (B3/B-/B-) at 99.507 to yield 8½% via ING.

The deal priced at the tight end of revised price guidance, which was lowered to 8½% to 8¾% from the 8¾% area.

EM carries on strong

Emerging market debt continued to strum along as the Dow Jones Industrial Average index closed above 12,000 for the first time Thursday, despite mixed earnings reports from several U.S. corporations.

Equities continued to see momentum on the belief that the U.S. economy is headed for a soft landing.

Against that supportive backdrop, emerging market debt tightened yet again Thursday.

Typically, the month of October delivers some sort of correction for the equity market, noted a buyside source. But so far this month, the market is breaking from tradition as investors price in a goldilocks scenario, the right mix of inflation coupled with U.S. economic growth.

"We're a little bit surprised about how well the market in EM is trading here, particularly the CDS market [credit derivative swaps]," remarked the source.

"The cash market hasn't really done much but CDS has outperformed the cash market significantly."

Since this month looks to escape a prolonged sell-off, the buyside source said that she is more bullish than bearish, but that outlook is tinged with some caution.

If the Federal Reserve is unable to manufacture a Goldilocks scenario, the market will be headed for a shake-up, she observed.

Ecuador slips

Turning to Ecuador, the country erased some gains Thursday. Bond prices have gone bananas this week as the results from Sunday's presidential election shift on a daily basis, noted sources.

On Monday, the country's bonds soared as initial results suggested an increased likelihood that market friendly candidate and the country's biggest banana exporter Alvaro Noboa would emerge as the winner in the Nov. 26 second round vote. On that day, Ecuador tightened by a monstrous 87 basis points while posting a 6.70% daily return.

But on Tuesday, the tables turned as manual results showed that radical leftist Rafael Correa and Noboa were in dead heat. And then again on Wednesday there was a reversal as results showed that the country's wealthiest man had solidified his lead over Correa, which helped the country rally.

On Thursday, the country slid as the bonds due 2030 eased 0.10 to 97.60 bid, 98.40 offered.

The buyside source said she was surprised but not shocked by the election results, since polls in the Andean nation are rarely a good indicator of how the electorate will vote. Instead, she is stunned by how the bonds have moved up and down.

On Monday, the 2030 bond gained 6.70 to 98.45 bid, 98.95 offered.

Brazil okay ahead of poll

Over to Brazil, politics in that nation have taken a back seat on the increased likelihood that president Luiz Inacio Lula da Silva has locked in his second term as president.

On Oct. 29, he will face off against Geraldo Alckmin, the market-preferred candidate and former governor of Sao Paulo. Lula failed to win an outright victory in the first round vote on Oct. 1, as his party was engulfed in allegations of a scheme to purchase documents meant to discredit the opposition party. Before the election, there were pictures shown of aides for the Workers' Party carrying bags of cash in efforts to buy opponents, which helped Alckmin narrow the gap.

Prior to the election, the market went from being comfortable with Lula winning. Then sentiment turned exuberant after the election, on hopes that Alckmin could win, noted the buyside source.

"Now it doesn't look that way. And we're back to, 'Oh, it's Lula' and we're still comfortable with that," she added.

Meanwhile there are rumors that a local magazine will name the source of the money behind the corruption charges, noted the buyside source.

"If Lula is anyway involved, that will probably hurt him. But then again, we're back in the scenario that Alckmin can take advantage of that.

"I think either way, investors are comfortable with whatever the outcome will be."

Meanwhile local markets have been rallying as the country's central bank cut its basic interest rate by 50 basis points to 14¼%, the 10th consecutive reduction.

"The real has been incredibly strong. In the late afternoon, it gave up a little bit. But fundamentally again, I think the real should be supported here," she noted.

During the session, the bellwether Brazilian bond due 2040 lost 0.10 to 130.95 bid, 131 offered.

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