Emerging market debt retraces gains as Treasuries play spoiler; Lehman index news boosts Russia

By Reshmi Basu and Paul A. Harris

New York, Jan. 25 - Emerging market debt was off to a good start Tuesday until better-than-expected consumer confidence data sparked a tumble in the U.S. Treasury market.

In the last few sessions, the market's price action has picked up speed on improving technicals, lower Treasury yields and the strengthening of the dollar. But on Tuesday, emerging markets' momentum was derailed as rate hike woes raised their head on economic news, prompting off a sell-off in the U.S. Treasury market.

"Early on, you saw a further rise. Brazil kept things on the outside of the range, particularly on the '40s beyond 115.60- 115.70," said Enrique Alvarez, Latin America debt strategist for think tank IDEAglobal.

By noon ET, the Brazil bond due 2040 was up 0.15 to 115.40 bid.

But then the consumer confidence numbers wreaked havoc in the Treasuries market, particularly in the 10-year note, said Alvarez.

The Conference Board's consumer confidence index grew to 103.4 in January from a revised 102.7 in December. Treasury yields jumped from their near six-week low as the market began to rethink the health of the U.S economy.

The yield on the 10-year note moved to 4.20% from 4.12% at Monday's close.

At the end of the session, Brazil's 2040 bond had fallen to 114.95 bid, down 0.30 on the day.

Similarly, the Mexico bond due 2009 was bid at 121.40 early on; it closed at 121.35 bid, down 0.40.

"Overall, the tone at the start of the day was a lot more positive than what it ended up being," said Alvarez.

In general, Tuesday's session saw flat to slightly higher returns. The Brazil C bond gained 0.062 to 102 1/8 bid. The Turkey bond due 2030 was higher by 0.310 to 142.56 bid. The Venezuela bond due 2027 fell 0.40 to 103 bid.

Tuesday's out performer of the day was Ecuador. The Ecuador bond due 2030 moved up 0.35 to 92 bid.

"People continue to be enthusiastic about the upgrade we saw yesterday [Monday from Standard & Poor's] - and then looking forward, the mix of private placement, possible float and some sort of swap proposal for the Ecuador '12," said Alvarez.

Standard & Poor's lifted Ecuador's long-term foreign and local currency credit rating to B- from CCC+.

The bond due 2012 fell 0.60 to 103.90 bid. The price is capped because the government is expected to call the notes at par when a swap proposal is put on the table.

"I think much of the move in the EMBI+ this week has been due to the renewed strength in USTs and in EUR/USD, at least until today [Tuesday], that is," said an emerging market analyst in the early afternoon.

"30Y UST yields are near their all-time lows, and that has some investors spooked that the bid-for-yield trade will keep going longer than some had thought.

"Today's [Tuesday's] consumer confidence number has dampened that excitement a little, but 10Y UST yields are still below 4.20%, and it's hard to get bearish on EM with rates that low," he added.

Selic minutes, GDP coming up

Looking ahead, investors will be eying Thursday's release of the minutes from Brazil's monetary policy meeting last week, in which the Central Bank hiked the Selic rate by half a point to 18¼%.

Alvarez added that Friday's GDP numbers would also play an important role in hinting at the strength of the U.S economy as well as pinpointing the direction of the Treasury market.

"If yields back up even more on the 10-year, obviously we are going to feel additional pressure. We're sort of midway in a range, so really nothing is changing very much," said Alvarez.

"Unless we get above the 116s again on the Brazil '40s, nothing has changed for us.

And until the 2040s' hit below 112 handle, trading will be range bound.

Lehman helps Russia

Late in Wednesday's session, Russian paper had a strong bid as it was learned that Lehman Brothers would relax the inclusion rules for its global bond indexes. This would allow Russia to be let in sooner than later.

"There has been a lot of activity in the Russia '30, which broke through a long-standing resistance level of 103.5, and was seen at 104.25 bid, which is an all-time high," said a market source.

"It's definitely benefiting from the positive sentiment on the news that Russia will be included in the Lehman Brothers index. We're taking that to mean that starting in July, regardless of the timing of Standard & Poor's upgrade, Russian sovereign eurobonds and senior bonds of VTB [Vneshtorgbank] and Sberbank will be investment grade.

"If they are included in the Lehman Aggregate, Russia will become its fifth largest name," said the source.

By noon ET, the Russia bond due 2030 gained ¾ of a point to 104 1/8 bid. But then it retraced some of its gains, ending the session at 104 bid.

The Lehman news will help bring more inflows into the market, adding support to technicals, remarked the analyst.

"The Lehman news about Russia is only icing on the cake, but it should definitely help technicals as crossover accounts take paper from traditional EM investors, freeing up new money to get put to work in other EM names.

"I think the market will bounce along waiting for more direction from the Fed and from USTs for now," he added.

Hanaro, First Investment Bank price

In the primary market, South Korea's Hanaro Telecom, Inc. priced $500 million of seven-year global bonds (Ba2/BB) at 99.32 to yield 7 1/8%.

The book was over six-times oversubscribed, according to a source. Asia made up 40% of the orders, followed by the United States with 33% and Europe with 25%. There was significant retail and fund management participation.

In the secondary, Hanaro was bid at 1001/2, 101½ offered, up over a point from the re-offer price.

JP Morgan and UBS Investment Bank were joint bookrunners for the Rule 144A/Regulation S offering.

And First Investment Bank Bulgaria also came to market with its upsized €200 million of three-year bonds (Ba3/B+). It priced at 99.482 to yield 7.70%.

ABN Amro and Dresdner Kleinwort Wasserstein ran the Regulation S deal.

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