Emerging market debt rebounds; China prices $1.7 billion bonds in euros, dollars; Brazil back up

By Reshmi Basu and Paul A. Harris

New York, Oct. 21 - Emerging market paper bounced back slightly Thursday after several sessions of losses, but political troubles in Ecuador pulled down that country's paper.

In primary news, the People's Republic of China priced $1.7 billion equivalent of bonds in two tranches. The sovereign priced €1 billion of 10-year bonds to yield 40 basis points more than mid-swaps and $500 million of five-year notes to yield Treasuries plus 60 basis points.

One market source said the rare euro-denominated issue by China attracted Europeans.

"The book was mostly European," said the source. "And the dollar was mostly Asian."

Along with China, three Latin American corporates came to market. Chile's Codelco priced $500 million of 10-year senior unsecured notes (A2/A) at 98.482 to yield Treasuries plus 95 basis points or 4.945% via Citigroup and HSBC.

Argentina's Pan American Energy LLC priced $100 million of five-year notes (B1/B/B+) at 99.483 to yield 7¼% via Deutsche Bank.

The book size was around $160 million, according to the market source.

And CA Electricidad de Caracas priced $260 million bonds due 2014 (//B+) at par to yield 10¼% via ABN Amro.

Emerging market paper up

In trading, emerging market paper gained ground Thursday after several sessions of soft action. The JP Morgan EMBI+ Index tightened by five basis points to 418 basis points more than Treasuries.

"In general, the market has drifted a little bit higher," said Enrique Alvarez, Latin American debt strategist for think tank IDEAglobal.

He added that there were two themes running through Latin American trading: Brazil's rate hike and Ecuador's political unraveling.

"Brazil is sort of in a digestive phase after the surprise move on the part of the Copom," he said.

"I think the market at this juncture is saying, 'Okay, they are trying to stay ahead of the curve on inflation.'"

The Central Bank caught the market off guard Wednesday night by raising its benchmark Selic rate by half a point to 16.75%. The market had expected a quarter point hike.

But Alvarez noted the market will have more to say on the subject of the country's growth.

"They really are adjusting beyond what overall expectations were" within the country.

Hence, there may be a collateral effect either on the second round of municipal elections or on the popularity of President Luiz Inacio Lula da Silva, according to Alvarez.

"This could lead to a little more conflict among different forces in the government."

For now, the move is an overall positive for Brazil, but the jury is still out on what the long-term implications are, said Alvarez.

The Brazilian C-bond added 0.062 to 98.812 bid Thursday while the bond due 2040 was bid at 111.85, up 1/4.

Ecuador paper slammed

Elsewhere in Latin America, Ecuador's parliament pushed ahead with a motion to impeach president Lucio Gutierrez.

"And there are louder and louder voices" in Ecuador backing impeachment proceedings against Gutierrez, said IDEAglobal's Alvarez.

"This has been an on-again/off-again theme ever since he met with [Abdala] Bucaram in Panama."

"The opposition has it out for him. And his government is overly weak.

"And it is not surprising that there is some pressure."

Congress impeached former Ecuadorian president "El Loco" Bucaram in 1997 alleging corruption, nepotism and embarrassing behavior.

On Sunday, voters backed parties leading a growing opposition movement in local and provincial elections. Preliminary results showed the president's party losing by large margins in two of the main provinces.

Moving contrary to high oil prices, Ecuador's paper was down Thursday. Its bond due 2012 fell two points to 991/2. The bond due 2030 lost 1 ¾ to 84 bid.

Looking ahead

Considering the outlook for emerging markets, Alvarez said investors would continue to focus on U.S. Treasuries and oil prices.

"If it [oil] retreats lower, I think that may be somewhat beneficial to overall Latam at these levels.

"If it treads higher, I think you may seen an inflection point and more focus on the actual effects of these very high oil prices on local gasoline prices and inflations rates throughout Latin America," he said.

While in recent sessions the market experienced a correction, given the all-time tight spreads overall technicals are still supportive, according to an emerging market analyst.

"Technicals at dedicated funds and at hedge funds probably aren't very good, but there is still plenty of crossover money out there looking for yield," he said.

"Unfortunately, the primary market is stepping in to soak up whatever excess demand is out there.

"I think we'd need the primary market to shut down for a few weeks and let demand catch up before spreads are going to retrace their recent widening," he said.

Hungary, Kazkommertsbank and Chohung Bank are expected to price within the next few days.

Hungary is bringing €1 billion of seven-year eurobonds, Kazkommertbank has a $300 million offering of five-year notes and Chohung Bank is selling $400 million 10-year subordinated notes in two tranches.

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