Emerging market debt prices knocked but spreads tighten; Xinao, Chartered price

By Reshmi Basu and Paul A. Harris

New York, July 29 - Emerging market debt prices dipped Friday as U.S. Treasuries posted losses on economic data. But despite the Treasuries tumble, spreads tightened.

Treasuries fell as the GDP report in the United States showed a strengthening economy, raising speculation that the Federal Reserve would continue hiking rates beyond the end of the year.

The yield on the 10-year note stood at 4.29% by the end of the day, up from Thursday's 4.19%.

"We tightened today [Friday], which bodes pretty well for our asset class. We held in despite the Treasuries sell-off, said a buyside source.

"The rumor has it that there are two large mandates that had to put money to work today [Friday]," said the source.

"And that actually brokers were struggling to get paper in order to offer it to clients.

"And that's probably why we're tighter," remarked the source.

During the session, the JP Morgan EMBI+ Index narrowed by seven basis points over Treasuries.

However, prices were down. The Brazil due 2040 slipped 0.30 to 117.45 bid. The Ecuador bond due 2030 slipped 1¼ points to 85¾ bid. The Russia bond due 2030 slid 1/8 of a point to 110¾ bid. The Turkey bond due 2030 was up 1.56 points to 142.56 bid.

"Generally, the market has been very resilient this week," according to a trader who focuses on high-yielding Asian securities.

"Brazil was stress-tested hard earlier in the week, and showed a lot of resilience.

"We saw a similar sort of thing in the high-grade market," added the trader.

Earlier in the week, investors were nervous ahead of the congressional testimony of Renilda Santiago. Santiago is the wife of ad executive Marcos Valerio, who is accused of being a bagman for the Workers Party in Brazil's ongoing bribes for votes scandal.

But the market rebounded as Santiago's testimony did not implicate finance minister Antônio Palocci or president Luiz Inácio Lula da Silva.

The trader added: "The tone across all of the credit markets has been very strong across the latter part of the week,"

The buyside source said that the market ended the week on a positive tone, but the source expects to see some volatility in the next week, stemming from new developments in the Brazilian corruption scandal.

"Just the fact that emerging markets held after a scare in Latin America and high grade shows a lot of strength," said the trader.

Meanwhile the trader said that the Philippines saw better buying.

"Nothing particularly huge, but there has definitely been some buying on the margin.

"Until then it had been noticeable how much it had languished," he added.

"The Philippine 2030 probably didn't make it much above 500 on a spread basis, on the widest, and on the tightest it was maybe mid-490s."

He noted that there was not anything particularly significant in the move.

"What's been noticeable is that while Brazil was making a point-and-a-half gains, Philippines has done very little.

"Normally what you expect in an emerging markets rally is people coming in to buy the Philippines as the laggard. And until today [Friday you had not really been seeing that."

During Friday's session, the Philippine bond due 2025 was down 0.12 to 110¾ bid.

Looking ahead, the market will need to reprice for higher U.S. Treasury rates, said sources, given that economic data is pointing to a stronger U.S. economy.

"But the technical picture is what is driving us right now," said the buyside source.

"There are a lot of trades out there that are quite crowded in emerging markets, so we might actually see a little bit of unwinding happening. We might get a little sell-off off that."

Two corporates price

On Friday, two corporates tapped the market with deals worth $825 million.

Beijing-based Xinao Gas Holdings Ltd. priced an upsized offering of $200 million in seven-year senior unsecured notes (Ba1/BB+) at par to yield 7 3/8.

The deal, increased from $150 million, came at the tight end of price guidance. Guidance had been set at 7 3/8% to 7 ½%.

Deutsche Bank was the bookrunner for the Regulation S transaction.

And Milpitas, Calif.-based Chartered Semiconductor Manufacturing priced $625 million in five-year and 10-year senior notes (Baa3/BBB-) Friday.

The $375 million portion of five-year notes priced at 98.896 to yield 190 basis points more than Treasuries.

Meanwhile the $250 million tranche of 10-year notes priced at 98.573 to yield 230 basis points more than Treasuries.

Both tranches came directly in line with price guidance.

The issue was increased from $450 million.

Goldman Sachs (Singapore) Pte. was the global coordinator for the Securities and Exchange Commission registered offering. Citigroup and Goldman Sachs (Singapore) Pte. were joint bookrunners.

The trader said that both deals have performed well in the secondary.

He said that the new deal from Xinao basically popped two points. He also added that the first trade for Chartered Semiconductor was 25 basis points inside the reoffer price.

The buyside said that the new issue pipeline will dry in August, which is customary for this time of the year.

"We've had a steady flow of deals, two or three a week. Eventually it adds up to quite a lot, but it never seems to be a particularly large amount just because right now they are relatively well spaced," said the trader.

"There is a possibility that Korea will come, and the Philippines would like to come, but nothing immediate."

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