Emerging market debt higher; Brazil up; El Salvador prices $268 million

By Reshmi Basu

New York, Sept. 14 - Emerging market debt traded higher as El Salvador came to market during Tuesday's session.

"It hasn't been too terribly exciting today [Tuesday]," said a trader.

"It's been mostly Colombia with the new issuance from yesterday [Monday] and El Salvador today."

The Republic of El Salvador priced a very over-subscribed $286.458 million of 30-year bonds with a put in year 15 (Baa3/BB+) at par to yield 7.625%.

Citigroup ran the books for the Rule 144A/Regulation S bond offering.

"It was up by two points in the gray," according to a buy-side source.

El Salvador came to market a day after the Republic of Colombia priced $500 million of global bonds (Ba2/BB). Colombia's deal priced at 98.248 to yield 8½% via Citigroup and Merrill Lynch.

"We've had a lot of interest in those bonds so far," added the trader.

"Colombia has been trading more active with the new deal yesterday [Monday].

In secondary activity Tuesday, the market was generally high with Brazil gaining on the day, noted the trader.

The Brazil C bond added 0.625 to 98.375 bid while the bond due 2040 was up 1.30 points to 109.20 bid.

"Pretty much everything is not as up as Brazil, but kind of up in line with Treasuries - generally the market feels stronger today," noted the trader.

In addition to the gains in Brazil, emerging market paper traded higher overall. The JP Morgan EMBI+ Index rose 0.37% during Tuesday's session. Its spread to Treasuries tightened three basis points to 428 basis points.

Russia still a good buy, says buy-side source

In response to the attacks in the North Ossetian town of Beslan, Russia's President Vladimir Putin has proposed sweeping changes to the political system, thereby giving the Kremlin more power. But while this may lead to suppression of democracy, Russia is still a good deal, according to the buy-side source.

"Singapore has never had a free election. Hong Kong has never had a free election. China has never had a free election," he said.

"It doesn't matter if you are a dictatorship or democracy. That's not what determines if it's good economic policy.

"You can have freedom without democracy. I don't think people understand that," he noted.

But the latest proposal by Putin does set an undertone for Russian paper for some investors, according to the source.

"For some people it does change. But to me it's a buying opportunity," he added.

The Russia bond due 2030 added 0.062 to 96.062 bid during Tuesday's session.

And while he still sees Brazil as attractive, the more its spreads tighten the more attractive Russia looks by comparison to the South American debt market giant, he said.

"It's just tightened so much. At the beginning of May, you could buy Brazil at 750 over. Today [Tuesday], it's at 500 over.

"You are paying 250. Even from year-end, it's tightened in significantly.

"The market is looking pretty rich to me. I still think Brazil is going to do well, but I think it's more relative value at this point than absolute value in Brazil.

"I think Russia has absolute value," he noted.

Local markets price in Selic hike

In Brazil, the Central Bank monetary policy committee (Copom) began its two-day meeting to set the direction on the 16% Selic rate.

"We were looking at the currency this morning and we were thinking that the local markets were probably pricing to a rate hike," said a debt strategist.

Meanwhile, there may be a possibility that there is only one U.S rate hike this year, he noted.

"If things calm down, then maybe in three to six months time we can start talking about possible rate declines," he said.

In the meantime, the short-term carry trade is still profitable, according to the strategist.

"You can argue that the [Brazil] real has certainly been the strongest it has been all year.

"The question is: 'Is it rich yet?'"

"If you look at the steady progression of Brazilian trade surpluses and compare it to the steady progression of Turkish trade deficits, the real is not the local currency with a lot of yield that I would pick as being the most overvalued in emerging markets," he noted.

"I would say that the Turkish lira has more risk associated with it than the real, but no one cares because they are all looking for a successful accession date to be announced in December with the EU negotiations.

"That sentiment will dominate all other economic fundamentals," he added.

Genting prices

In other primary action, Malaysia's Genting Bhd priced $300 million of 10-year bonds (Baa1/BBB+) at 99.39 to yield Treasuries plus 132 basis points.

Citigroup and HSBC were lead managers for the Regulation S offering for the hotel and casino operator.

Among upcoming deals, the Republic of South Korea set price guidance for its $1 billion 10-year global bonds at Treasuries plus 87 basis points.

Barclays Capital, Citigroup, Deutsche Bank and JP Morgan are running the deal for Securities and Exchange Commission-registered notes.

Adding to the pipeline Tuesday was Cesky Mobil. The Czech Republic subsidiary of Montreal-based Telesystem International Wireless Inc. is expected to offer €350 million of senior secured bonds in early October.

UBS Investment Bank and JP Morgan will have the books.

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