Emerging market debt slides with Treasuries on surprisingly strong payrolls

By Reshmi Basu and Paul A. Harris

New York, April 2 - Emerging market debt took a hit Friday as a rosier U.S. job picture increased fears of impending interest rate hikes. Emerging market debt traded down as Treasuries sank.

U.S. non-farm payrolls jumped by an unexpected 308,009 in March, the biggest gain since April 2000.

"As soon as the report came out everything fell across the board," said a trader.

The payroll number was much higher than economists' expectations of 123,000 new jobs. But the unemployment rate rose to 5.7% from 5.6%.

Indicating the fall in emerging markets, the JP Morgan EMBI global index fell 1.28%. Its spread to Treasuries tightened seven basis points.

Latin America in particular nosedived. The EMBI component for Brazil dropped 2.30%. Its spread to Treasuries tightened by 13 basis points.

"Argentina, Venezuela, Chile, Mexico - all down," said a buy-side source.

The Brazilian benchmark C bond closed the session at a 96.188 bid, offered 96.375, down 1.81 on the day. Its spread widened by 18 basis points.

"Before the numbers, the C bond was 98, and we're going out at 96. It's cost us two points," said a strategist.

"Emerging market debt traded down with Treasuries."

That broke a run of gains. Brazil had rallied in the past week as political noise died down and President Luiz Inacio Lula da Silva and his finance minister reiterated their commitment to economic reforms and fiscal responsibility.

In Thursday's trading, the Brazilian benchmark C bond finished at 97.938 bid, 98.062 offered, up

0.56 on the day. The Brazil component of the EMBI index had risen 0.52%.

If the pace of job creation is 150,000 to 175,000 a month moving forward, that would amount to the creation of a couple million of jobs this year, said the strategist.

"People would be more a lot more comfortable with the idea the U.S. economy has legs, that the expansion is sustainable."

On balance, the U.S. dollar on margin is bullish; the world economy on margin is bullish; and Treasuries on margin is bearish, the strategist said.

In that context, the effect on emerging market debt will depend on a particular investor's trading strategy.

"If they trade the growth story, basically it is good news for countries like Brazil, Latin American countries," says the strategist.

"If you focus only on the likelihood that the Fed raises rates sooner rather than later, then it maybe not good for people that run levered portfolios because it means that they have to anticipate an increase in their cost of funding. In that case, they have to shrink balance sheets," said the strategist.

Dwindling balance sheets mean that levered accounts will have to sell bonds.

"So you have basically good news on the fundamental side offset by the threat by the bad news on the technical.

"At the moment, I think the market will probably focus on the technicals," added the strategist.

Hutchison Whampoa trades higher

Hong Kong telecommunications firm Hutchison Whampoa bounced back Friday.

"It traded up after drifting wider yesterday," said a trader.

Hutchison announced that it was offering a new-third generation wireless phone for almost half of the price of its previous cheapest 3G phone.

Its 6¼% bond due 2014 closed at 193 basis points bid, 188 bps offered. That was 1 bp better than Thursday's close of 194 bps bid, 190 offered. Its 7.45% bond due 2033 closed at 233 bps bid, 228 bps offered, 1 bp better than Thursday's close of 234 bps bid, 229 bps offered. And its 5.45% bond due 2014 was bid at 209 bps, 204 bps offered, 1 bp better Thursday's 210 bid, 205 bps offered.

Kazkommertsbank sells second tranche

Kazakhstan's largest bank Kazkommertsbank priced the second tranche of its borrowing exercise. It sold $400 million 10-year senior notes at 99.15 to yield 8% Friday.

On Thursday, Kazkommertsbank priced $100 million of 10-year subordinated 7 3/8% notes (Baa3/B) at 99.535 to yield a spread of 464 basis points over Treasuries.

Citigroup and ING ran the books on the two-part Rule 144A/ Regulation S offerings.

Also, Russian Standard Bank priced an upsized $150 million three-year senior unsecured notes (Ba3/B) at par to yield 8¾%.

The yield came at the rich end of talk which had put the yield at 8¾% to 8 7/8%.

Barclays Capital and Citigroup ran the books on the Regulation S issue.

Meanwhile, the Republic of Croatia priced its €500 million 10-year notes (Baa3/BBB-/BBB-) at 99.155 to yield 5.11%.

The yield came right in line with price guidance of mid-swaps plus 100 basis points.

UBS Investment Bank and JP Morgan ran the Regulation S deal.

Meanwhile the Republic of Lebanon added to the pipeline of upcoming deals with an expected seven-year offering (B2/B-).

BNP Paribas SA and Credit Suisse First Boston to run the deal, expected to price in April.

Proceeds will be used to pay maturing foreign bonds and loans.

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