Emerging market debt down as 10-year Treasury yield hits six-month high; Poland sells $1.1 billion

By Reshmi Basu and Paul A. Harris

New York, Oct. 12- Emerging market debt crumbled Wednesday as U.S. Treasuries looked set to break into a new range.

In the primary market, the Republic of Poland sold $1.1 billion of sovereign bonds (A2/BBB+).

The sale included $1 billion of 5% 10-year bonds that priced at 99.899 to yield 5.013%, a 12 basis points spread to mid-swaps. That spread came on the tight end of the 12 to 14 basis points price talk.

Also in a sale driven by a reverse inquiry, Poland issued $100 million of 30-year bonds that priced at par to yield 5.408%, a 29 basis points spread to mid-swaps.

The $100 million tranche was done for a single investor in the United States, who came in with a request at the "nose-bleed level" of 29 basis points over swaps, a sellside source said.

There was a 17 basis points difference between Poland's new 10-year and 30-year bonds, noted the source.

Earlier this year, Poland sold an upsized offering of €3 billion notes due 2020 to yield mid-swaps plus 27 basis points in January.

The sellside source said that the euro-denominated issue was pretty tight in terms of swap spread from the 10-year bonds to 30-year bonds.

This is the first dollar-denominated deal by Poland since October 2003.

JP Morgan and Lehman Brothers managed the sale.

Turning to primary market action in Asia, China's Fosun International Ltd. downsized its offering of seven-year senior notes (Ba3/BB-) to a range of $325 million to $350 million from the original $500 million offering-size.

Price talk is 9% area, with pricing expected on Thursday. Last week the market heard preliminary guidance of 8½% to 9%.

Morgan Stanley and Citigroup are joint bookrunners for the Rule 144A/Regulation S with no registration rights offering.

Moving to South Korea, GS Caltex Corp. plans to start a roadshow for an offering of $300 million in 10-year fixed rate bonds (Baa1/BBB+) this Thursday in Singapore, according to market sources.

Banc of America, Barclays Capital and Merrill Lynch are the lead managers for the Rule 144A/Regulation S (without registration rights) deal.

And Korea East-West Power Co. Ltd., a wholly owned subsidiary of state-owned power monopoly Korea Electric Power Corp. (Kepco) is expected to bring a $250 million offering of 10-year bonds later this month or early in November.

Barclay's Capital, Credit Suisse First Boston and Lehman Brothers will manage the deal.

Out of Malaysia, Penerbangan Malaysia Bhd. plans to start a roadshow for a $1 billion offering of 10-year bonds (A3/A-) on Thursday.

CIMB Bhd., Citigroup and HSBC are managing the sale.

Emerging markets has been so weak for the past few days that issuers really don't want to get in, said the sellside source, who added that the market will not be at full force given the Yom Kippur holiday on Thursday and the release of U.S. consumer price index data in on Friday.

"I think that we have seen what we can expect to see for a little while."

EM down

More speeches from Federal Reserve officials Wednesday made it clear that inflation is the central bank's number one priority.

Federal Reserve chief Alan Greenspan said that the flexible, resilient U.S. economy could "weather reasonably well the steep rise in spot and futures prices for oil and natural gas that we have experienced over the past two years."

His comments, in a speech to the National Italian American Foundation, did little to shed new light on the direction of the Fed's monetary policy, but did cement sentiment that more rate hikes will be used to curb inflationary pressure in the United States.

That sentiment helped send the yield on 10-year Treasury note to a six-month high. The yield on the 10-year note surged to 4.45% from Tuesday's close of 4.39%.

And higher Treasury yields along with increased risk aversion across all asset classes translated into wider spreads for emerging markets, said market sources.

"The market is pretty ugly," said a buyside source.

He relayed the following conversation he had with a market participant, who described the way the market had been positioning itself. Everyone had thought they had $100 million and everyone else had $50 million when the reality was that everyone had $100 million.

"It's been mainly driven by Street selling. Apparently no one wants to step in. Look at the U.S. equity market. Look at the high-yield market. Look at the Treasury market," added the buyside source.

Nonetheless, the buyside source questioned why emerging markets had been performing so well, given the poor performance by the high-yield market.

"I don't know why today [Wednesday] was different from two weeks ago or a month ago."

He added that the market is not cheap, so when negative or worrisome news hits the market, there is no cushion. He is surprised the sell-off finally happened, since he has been waiting for such an occurrence for months.

But the market is still not cheap given that it only widened by 10 basis points from record highs, he pointed out.

At 3 p.m. ET, the Colombia bond due 2012 was seen at 115 bid, down 1¾ points.

The Philippine bond due 2026 was spotted down 1.63 to 113½ bid. The Venezuela bond due 2027 was quoted down 1.90 to 113.70 bid. The Russia bond due 2030 slipped 2¾ points to 183 bid.

Moody's upgrade of Brazil helps ease selling

Earlier in the session, emerging markets, on the external side, felt worse than during Tuesday's session, said the sellside source.

But the source added that Brazil's upgrade by Moody's helped the market retrace some earlier losses. The source noted that the Brazil bond due 2040 was spotted down by 1.35 points. But the source had seen it down as much as two points before the upgrade.

There was a much better tone in local markets than in the external markets Wednesday, observed the sellside source.

"People are coming back in and putting cash in the local markets first."

The source added that investors had been using the Brazil 2040s to hedge just about anything.

"People who are stuck with illiquid positions, and can't sell them, it doesn't matter what country it is, they are selling Brazil 2040s against it as a hedge. That's probably pushing it down more than would otherwise be the case," added the sellside source.

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