Emerging market debt weaker across the board; oversubscribed Kepco prices

By Reshmi Basu and Paul A. Harris

New York, April 20 - Emerging market traded weaker Tuesday as Federal Reserve chief Alan Greenspan hinted that an interest rate hike could take place as soon as late spring or summer.

"Everything was hit across the board," said a trader.

In his testimony to the Senate Banking Committee, Greenspan said deflation was no longer an issue as "pricing power is gradually being restored.

"Inflationary pressures will be reasonably well contained so long as productivity is moving at a reasonably good clip - and unit labor costs, as best we can judge, are still going down," he said in his prepared testimony.

He also added that banks were well positioned for an interest rate hike.

Greenspan is scheduled to elaborate more on the economic outlook on Wednesday morning at the congressional Joint Economic Committee.

Greenspan and other members of the Fed's Open Market Committee meet May 4 to consider the level of interest rates.

But even before Greenspan's comments, the JP Morgan EMBI Index was wider, said a senior sell-side source.

"It has been generally holding in. Monday, we were two tighter. Today we're four wider," the source said.

"Obviously we had a pretty weak day last Thursday when Brazil really widened out. Friday was tighter. So it has been holding in. But there has certainly not been a rally or anything like that," added the senior sell-side source.

In early morning, Brazil looked to be seeing some buying interest, said a fund manager. But that didn't last and the afternoon saw selling.

"I don't to what extent it is real account selling or brokers are pushing prices down. It's hard to tell."

By the close of the session the JP Morgan EMBI Index was down 0.91%. Its spread to Treasuries widened by two basis points.

"Everything has traded down," said the fund manager.

"Brazil continues to trade down. Colombia is down. Mexico was basically wider on the long end."

While the intensity of emerging markets' reaction will depend on how violently Treasury the curve moves, a slow down in new issuance is expected with higher borrowing costs.

Rates have been moving "quite aggressively on the short end, which has seen most of the action," said the fund manager.

"The long end hasn't moved much," he added.

"It's another nail in the coffin for the EM credits that need external liquidity," said an emerging market analyst.

"U.S. rates are going up again today, and if Greenspan has similar comments about how U.S. corporates and consumers are prepared for higher rates when he gives his testimony tomorrow, rates will be up even more tomorrow."

"Brazil is the one showing the most stress, but Turkey and even Russia are getting hit today as well," he added.

The Brazilian component of the EMBI Index was down 1.72%. Its spread to Treasuries widened by 11 basis points.

The Brazilian benchmark C bond closed the day down 1.69 at 92.625 bid, 92.812 offered, down 1.69. The bond due 2040 was down 2.7 at 95.8 bid, 96.45 offered, down 2.7.

Turkey suffers on Cyprus question

However, one of the reasons why Turkey has been hit is due to the negotiations over Cyprus.

"Turkey is bid at 1341/2, offered 1361/2. The high was 143 two weeks ago. It is down significantly on the Cyprus referendum," said the fund manager.

Greek and Turkish Cypriots are due to vote on a reunification plan in simultaneous referendums on April 24. If it is approved, a unified Cyprus will join the European Union.

Otherwise, the union will only admit the internationally recognized Greek Cypriot government.

Gazprom $1.2 billion expected this week

Russian natural gas company Gazprom's $1.2 billion notes are expected to price this week, according to the senior sell-side source.

The issue has been marketed as a "benchmark" bond.

"They have said 'five years or longer,' and we've heard that they have been testing longer structures," the source said. "But we have not heard anything formal yet."

"They're in the U.S. beginning Wednesday. So we're expecting to see something explicit pretty soon.

"You would expect it to come as fixed-rate paper, but so far they have not even specified that," added the senior sell-side source.

Credit Suisse First Boston and Deutsche Bank Securities are running the Rule 144A/Regulation S deal.

The roadshow started on April 19 in Germany and Los Angeles, moved to Switzerland and the Midwest on April 20, will be in New York on April 21, and on April 22 be in London and Boston.

Korean, Mexican corporates price

Korea Electric Power Corp. (Kepco) priced $300 million of 30-year notes to yield 93 basis points over Treasuries.

The 5 1/8% notes priced at 98.434 to yield 5.329%.

The deal came at the tight end of price talk. Talk on the deal had put the spread at 93 to 95 basis points Tuesday morning.

Investor demand ran to $3 billion on the deal, according to a source.

"Crossover accounts like those credits. And U.S. hybrid accounts want to play on those markets as a way to diversify as well," said the fund manager.

ABN Amro, Deutsche Bank, Morgan Stanley, Samsung Securities were bookrunners on the Rule 144A/Regulation S (without regulation rights) issue.

Also, Mexico City-based wireless communications company America Movil SA de CV priced $300 million three-year floating-rate notes at par to yield Libor plus 62.5 basis points.

Citigroup is running the Rule 144A (with regulation rights) deal.

And Kazakhstan's fourth largest bank ATF Bank set price guidance for its minimum $100 million three-year eurobond (Ba1/B+) at 8½% to 8¾%.

ING Financial Services is the bookrunner on the Regulation S deal.

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