Emerging market debt down on inflation worries, new supply; Panama sells upsized $600 million bonds

By Reshmi Basu and Paul A. Harris

New York, Nov. 16 - Emerging market debt edged lower Tuesday as a combination of U.S. producer price index data and new paper from Panama put a pinch on trading.

Stronger than expected PPI numbers raised inflation worries and built expectations that the Federal Reserve will accelerate its monetary tightening policy.

PPI shot up 1.7% in October, the biggest leap in nearly 15 years. The core PPI rate, which excludes food and energy, was up 0.3% for the second straight month.

"Overall, it [EM trading] was a subdued tone - a little on the defensive side," said Enrique Alvarez, Latin America debt strategist for think tank IDEAglobal.

"It [core PPI] did not set off anything really negative in the [U.S] Treasury market, but what it has done is refocus most investors on tomorrow's [Wednesday] CPI numbers and CPI going forward."

The yield on the 10-year U.S Treasury note rose to 4.21% compared to 4.18% at Monday's close.

"Inflation, which was lost in the boonies, has crept back into the equation as far as watching the Treasury market and in turn how that will affect emerging markets," he said.

Emerging market paper fell slightly Tuesday.

The Brazil C bond lost 1/8 of a point to 99 7/8 bid while the bond due 2040 fell 0.050 to 114.40 bid.

Russia's bond due 2030 was bid at 101.12, down 0.005. The Venezuela bond due 2027 slipped 0.10 to 103½ bid.

Panama's new deal

Another factor weighing on the market was new issuance by the Republic of Panama, said Alvarez.

Panama priced an upsized $600 million bond due 2015 at 99.301 to yield 7.35% or a spread of 314 basis points over Treasuries.

"You have the Panama issuance which I think went pretty well", commented Alvarez.

"They upped it to $600 from $500 million. The spread seems somewhat tight - 314 for 10-year paper looks to be pretty good."

Morgan Stanley was the sole bookrunner.

"I think that was a positive for the market that Panama was able to get that off on a day when you had a surprised market due to the uptick in PPI," he said.

In trading, Panama's existing bond due 2020 fell half a point to 119½ bid.

The Panama deal came the day after Mexico sold €750 million bonds due 2020 at 99.561 to yield 5.646% or a spread of mid-swaps plus 142 basis points. The deal came via Credit Suisse First Boston and Deutsche Bank.

Market sources said Mexico's paper was weaker Monday on excess supply from the new euro deal.

Euro-denominated issues are "skewed toward a totally different market," said Alvarez.

"Usually when you issue euro paper and it's bought out of Europe, which 75% to 80% of this issuance was, it usually sits in investors' portfolio. It's not traded very frequently, so that supply doesn't weigh down the existing supply that is traded with more liquidity in the market," he said.

"We are a little softer today [Tuesday], but that may be more of a result of the workings of the 10-year U.S Treasury instead of the actual issuance," he noted.

In Tuesday's trading, Mexico was slightly down. The Mexico bond due 2009 was down 0.15 to 122.65 bid.

On buyside source noted the strong response to Mexico's deal and saw it as a sign that the market has gone as far as it can go.

"Yesterday [Monday] Mexico sold €750 million of 15-year bonds at spread of 188 basis points [over Bunds], said a buyside source.

"The deal was two-times oversubscribed.

"It makes you wonder what's next!

"This has got to be the top of the market," noted the source.

While this may be the case, emerging market paper appears well positioned to remain there at least until the end of the year, according to an emerging market analyst.

"We may be at the top of the market, but it's a plateau we may be able to stay on for a while," said the analyst.

"The technicals remain good, with new cash coming in, coupons and amortizations getting recycled into the market, and issuance remaining in line with what investors expect.

"Unless some major negative development occurs in the next few weeks - like more bad U.S inflation data or a turnaround in oil prices - I expect we can coast at these spread levels into January.

"Then, the new issuance will probably catch up with the market, but until then things could be relatively smooth sailing," he noted.

Rumored deals in 2004

Meanwhile, talk circulated as to who the next issuers will be.

Brazil (B1/BB-) is rumored to be coming to the market with a benchmark real-linked issuance.

Also in the rumor mill is Colombia's Corporación Andina de Fomento's (CAF) (A2/A) with a $1 billion offering expected by year-end, according to a market source.

Philippines (Ba2/BB) and Turkey (B1/BB-) are also seen tapping the market this year.

And Colombia (Ba1/BB) may hit the market with a $1.5 billion issuance to prefund 2005.

In other news, Latin American corporate bonds were generally steady Tuesday.

Grupo Minero Mexico SA de CV (GMM)'s bond due 2028 was up half a point to 98 bid, 100 offered.

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