Emerging market debt performs well on U.S. Treasuries rally; Uruguay sells $200 million 17-year bonds

By Reshmi Basu and Paul A. Harris

New York, Nov. 15 - Emerging market debt edged higher Tuesday on the back of a U.S. Treasuries rally.

In the primary market, one sovereign and two corporates tapped the capital markets.

The Republic of Uruguay priced a $200 million offering of 17-year global bonds (B3/B/B+) at 98.237 to yield 8.20% via UBS Investment Bank.

A trader said the new issue was well received and that the new bond had moved up about 1 point in trading.

Coming out of Kazakhstan, Alliance Bank JSC priced $200 million of five-year bonds at 99.017 to yield 9¼%.

ABN Amro and Citigroup were the lead managers.

Elsewhere, government-owned Korea Development Bank priced $500 million of seven-year floating-rate notes (A3/A/A+) at par to yield a spread of Libor plus 28 basis points.

Barclays Capital, Credit Suisse First Boston and Morgan Stanley were the joint lead managers.

EM up on Treasuries

Emerging market debt saw higher prices in response to a Treasuries rally. Treasury yields contracted after comments made by Federal Reserve chairman nominee Ben Bernanke, who sent a signal to the market that he would follow the path set by outgoing Fed chief Alan Greenspan, if he gets the post.

"If I am confirmed, I am confident that my colleagues on the Federal Open Market Committee and I will maintain the focus on long-term price stability as monetary policy's greatest contribution to general economic prosperity and maximum employment," said Bernanke, a former Fed governor, to the Senate banking committee.

Those comments helped Treasuries gain strength. The yield on the 10-year note stood at 4.56%, from Monday's close of 4.62%.

A Treasuries rally translated into slightly higher returns for emerging market debt Tuesday. Nonetheless, trading volume was thin, remarked sources.

"The market is doing pretty well today [Tuesday]," said a sellside source.

"Brazil is doing well. Mexico is a couple of points wider, basically on the back of the Treasuries rally."

During the session, the JP Morgan EMBI Global Diversified index rose 0.3% while its spread over Treasuries widened by one basis point.

Brazil rebounds

The day before, Brazilian bonds saw selling pressure as political noise resurfaced. More allegations of wrong doings are plaguing finance minister Antonio Palocci. Investors fear that the country's market-friendly finance minister could become the latest victim of the country's long-lasting political scandal.

While Brazilian bonds came under pressure Monday, there was no sense of panic on the country's external debt side. Instead the Brazilian currency felt the brunt of the news while the country's benchmark 2040 bond held above 120 bid, which is a sign that investors are comfortable with fundamentals, observed a market source.

During Tuesday's session, Brazilian paper rebounded and spreads tightened, said sources.

At session close, the 2040 bond gained 0.60 to 120.90 bid.

Nonetheless, the Palocci situation is difficult to assess, given the number of rumors floating around, noted a buyside source.

"If he does leave, the question is who will replace him?

"It's hard to make any judgment at this point. We are definitely more aware of the volatility," said the source.

Moreover, the market is over-confident about the continuity of economic policy, warned an emerging market analyst.

"Palocci could easily be gone a month from now, and there is no one of his caliber - combining political savvy with a strong commitment to good economic policy - who could step into the finance ministry," he said.

Focus on Mexico

This week investors will be focusing on United Mexican States' offering of three series of debt exchange warrants that would allow holders to exchange a specified amount of dollar-denominated global bonds in return for a fixed dollar principal amount of peso-denominated Bonos in pesos on the expiration date.

"I think that's a very welcome development," remarked the buyside source.

"It's a product that is not for everybody, so we need to really assess which accounts can do that, particularly because of the warrants structure," noted the buyside source.

"And Panama is doing a nice liability management operation. They are trying to retire some of the shorter maturity debt and issue on the longer end," said the source.

The Republic of Panama announced Monday an offer to swap its global bonds for cash. Additionally, the country said it would issue global bonds due 2026 to finance the tender offer.

Although this week sees a deluge of economic data out of the United States, the buyside source said the focus will be on Mexico.

"I think everybody is reaching fatigue from U.S. data. We don't know what is driving us anymore," said the source, adding that the market will be fairly quiet leading into next week's Thanksgiving break in the United States - that is, unless Brazil sees more volatility.

Overall, market sentiment is positive and should remain so until year-end as investors feed into the traditional year-end rally.

"We have seen inflows again," which is helping support the market sentiment, remarked the buyside source.

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