Emerging market debt flat to lower after Tuesday's rebound; Lebanon prices

By Reshmi Basu and Paul A. Harris

New York, May 12 - Gains scored Tuesday in emerging markets debt were partially erased Wednesday but high oil prices provided a lift to Ecuador and Venezuela.

While bargain shoppers initiated a recovery during Tuesday's session, the streak ended at one day as bidders returned to the sidelines.

"We saw some activity during the morning hours," said a strategist.

"And then there was a minor sell off. We also had some activity during the middle of the day and now the market is down," he added.

The JP Morgan EMBI Index fell 0.15% on the day. Its spread to Treasuries tightened by eight basis points to 514 basis points.

Primarily hedge funds have been bidding for cheap bonds, said the strategist.

"There were players entering the market yesterday [Tuesday] and today [Wednesday], basically hedge funds," said the strategist.

Meanwhile, Ecuador and Venezuela rose as oil prices hit a 13-year high.

The Ecuador component of the EMBI Index rose 2.59%. Its spread to Treasuries tightened by 69 basis points to 956 basis points.

"Oil is shooting above $40 a barrel," said a trader. "It's helping Venezuela and Ecuador."

Some had expected that Tuesday's buying would usher in a short-tem rebound as the market found support for cheap prices. However, Wednesday's emerging debt performance by countries including Turkey coupled with wavering Latin American equity and currency markets may signal that more volatility lies ahead.

"I don't things are stabilizing at this point," said a sell-side official.

"You saw what happened Monday. Tuesday was a good day and people thought that the markets would recover in the coming days."

"However that's not what we saw today. The Brazilian equity market went down almost 1.5%. Argentina went down almost 2%," added the sell-side source.

"Turkey got crushed during the past five trading sessions," noted the sell-side official.

The sell-side source pointed to the ups and downs of the Brazilian benchmark C-bonds in the last few days as further evidence.

"Two days ago they traded around 85 bid, 85.5 offered. Tuesday they went all the way up to 88.5. On Wednesday, however they were back trading at 87 bid, 87.25 offered. They closed around 87.75 at the end of the day."

The Brazilian C bond was down 0.31. The Brazil bond due 2040 slid 1.15 to 85.65 bid, 86½ offered.

"And look at what happened to the currencies," said the sell-side official.

"The Brazilian real was trading today at a low of 3.15, on Monday. Tuesday it came back to 3.07. But Wednesday it went back to 3.14."

The Brazil component of the EMBI Index fell 0.35%. Its spread to Treasuries tightened by 10 basis points to 744 basis points.

Adding to the instability, the volatile condition means that issuers will shelve deals unless they are willing to pay premium - an unlikely scenario, said the sell-side official.

"So it remains too volatile in emerging markets and I don't think this is the right environment to be coming into the market unless you have a solid base where you know you can place your bond."

Brazil has about $2.5 billion of sovereign debt to issue this year.

"They're pretty much done for the year," said the sell-side official.

"They can wait a few more months to see what happens. Or they can look for different sources."

"The IMF is always there for Brazil, given some restrictions, of course. And there is nothing fundamentally wrong with Brazil, at this point; nothing has changed, fundamentally, in the past month or so," added the sell-side official.

And Banco de Brasil is rumored to have pulled a subordinated debt deal because of market conditions.

"That's the right thing to do at this point. You don't want to be a hero. There is nothing to prove," added the sell-side official.

Lebanon prices in dollars, euros

Nonetheless, the Republic of Lebanon priced a two-tranche offering Wednesday, rushing ahead of looming U.S. interest rate raises.

"Lebanon is special because it can tap a lot of offshore Lebanese cash to finance its deficit and it also has a bid from Gulf States money," said an emerging market analyst.

"So you can't extrapolate much from a Lebanon new issue, other than the fact that they wanted to move as soon as possible before U.S. interest rates go even higher.

The country priced its $950 million seven-year notes at 99.34 to yield 8% and its €225 million five-year notes at par to yield 7¼%.

BNP Paribas and Credit Suisse First Boston were the bookrunners on the Rule 144A/Regulation S offering.

Mobile Telesystem spostpones

Meanwhile Russia's OAO Mobile Telesystems postponed its offering of $600 million 10-year notes due to unstable market conditions.

Credit Suisse First Boston and Goldman Sachs were running the Rule 144A/Regulation S offering for the Moscow-based cellular service provider.

And the City of Kiev is expected to name Deutsche Bank and Morgan Stanley to run its Regulation S $200 million five- to 10-year bonds.

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