Emerging market debt positive on light volumes; China's Hopson sells $300 million seven-year notes

By Reshmi Basu

New York, Nov. 2 - Emerging market debt continued to trade with a positive tone Wednesday, but volumes remained light ahead of Federal Reserve chief's Alan Greenspan's congressional testimony on Thursday and the release of U.S. non-farm payroll numbers on Friday.

In the primary market, China's Hopson Development Holdings Ltd. sold $300 million of seven-year senior unsecured notes (Ba2/BB+) at par to yield 8 1/8%.

Credit Suisse First Boston was the bookrunner for the Rule 144A/Regulation S transaction.

Meanwhile, two corporates added to the pipeline.

Bahrain-based Arab Banking Corp (Baa2/BBB) plans to start a roadshow next week for a dollar-denominated offering of five-year notes via Citigroup and HSBC.

Korea National Housing Corp. plans to start a roadshow this week for a €400 million in five-year notes (A3/A).

Citigroup, Deutsche Bank, HSBC and Morgan Stanley are managing the Regulation S transaction.

EM sees positive tone

Tuesday's decision by the Federal Reserve to raise short-term interest rates to 4% resulted in little response in emerging markets, according to market sources.

But the asset class is clearly trading with a positive tone, according to an emerging market analyst.

"The lighter new issuance that EM has enjoyed for the last few weeks has helped funds consolidate, and the general view that the wealth transfer from commodities buyers to commodities sellers will continue remains intact.

"The market has traded higher on relatively thin volume, though, so I would not read a lot into the recent move higher," he observed.

"Next week, once the illiquidity surrounding the Fed meeting and All Saints' Day [Nov. 1] is out of the way, will be more telling," he added.

During the session, the Brazil bond due 2040 was marked down 0.10 to 120.10 bid. Nonetheless, the 2040 bond traded above 120 bid for the third consecutive session.

The Ecuador bond due 2030 gained a quarter of a point to 90 bid. The Russia bond due 2030 added half a point to 117 bid.

Technical market, says strategist

Moreover, the asset class' resilience against an uncertain global backdrop is unsurprising to a debt strategist.

"I haven't really seen substantial across-the-board withdrawal from spread product," he noted.

"It's holding up pretty well in corporates, holding up well in U.S. high yield, holding up well in European credits and holding up well in emerging markets," he added.

However, the bond market is in a more dubious frame of mind, according to the strategist, who added the market is trying to decide whether to stabilize in its current trading range or sell off some more.

"I really think it's really going to be the bonds in the front of the curve that are going to dictate whether risk budgets expand or contract," he observed.

Looking ahead, the strategist said he is focusing on any drivers that affect inflationary sentiment, which could in turn impact the 10-year and 30-year Treasury maturities. That could become the catalyst for forward movements in mortgage-backed securities or swap-spreads or other instruments.

"I think it's a very technical market right now," he observed.

And while investors have been focusing on weekly flow numbers into dedicated emerging market funds, the strategist advises investors to monitor the U.S. dollar story, which appears to be quite robust.

"If we were having any problems with our access to international capital, we think we would see a stronger yen. In fact, you've seen a weaker yen.

"I think that's evidence that at least Japanese retail is very happy to put money outside of Japan into the dollar market looking for higher yields," he remarked.

That means that there is a funding source coming from Asia, that continues to support these levels,

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