Emerging market debt softer as Treasuries fall; new Mexico 30-year bonds slip in secondary

By Reshmi Basu and Paul A. Harris

New York, Sept. 23 - Emerging market debt dipped lower Thursday as U.S. Treasury prices fell on concerns that the Federal Reserve may be more aggressive in its interest rate policy.

"The market exhibited a softer tone today [Thursday]," said Enrique Alvarez, Latin America debt strategist for think tank IDEAglobal.

The market is still digesting the new supply, which has placed some downward pressure on the market, said Alvarez.

Other factors weighing down the Latin American market included Brazil's slightly higher inflation target for 2005 and the Central Bank's monetary policy committee's hawkish position, he observed.

"I think that brought about a little selling in Brazil," said Alvarez.

The Brazilian Central Bank said it would target consumer inflation at 5.1% in 2005 in order to curb inertial inflation from 2004, according to the minutes of its Sept. 14-15 interest rate meeting released Thursday. Originally, the target for 2005 was set at 4½%.

"In general, you had a softer market - some side effects from the U.S Treasury market backtracking a little bit and going to 4% on the 10-year," he added.

"You haven't had very wide ranges. It's been slowly eroding."

U.S. Treasury prices declined Thursday on concerns that the Federal Reserve plans a more aggressive tightening cycle. In the minutes of its August meeting, the Federal Open Market Committee said there was a need for "significant" interest rate hikes.

The 10-year U.S. Treasury note ended the session to yield 4.03% compared with 3.98% on Wednesday.

In emerging markets trading Brazil was down. The Brazil C bond dropped 0.562 to 98¾ bid while the bond due 2040 lost 1.15 to 112½ bid.

Other losers for the day included paper from Mexico and Russia. The Mexico bond due 2008 was bid at 1143/4, down 0.40. The Russia bond due 2030 lost half a point to 97 bid.

Overall, the JP Morgan EMBI+ index was down 0.34% at late afternoon. Its spread to Treasuries was unchanged to 416 basis points.

Mexico's new bond lower

Also weak was Mexico's newly issued 30-year bonds.

On Wednesday, Mexico priced $1.5 billion of 30-year bonds to yield 6.88% or 210 basis points more than U.S. Treasuries. The deal was increased from $1 billion.

A market source said that the new bond was doing worse than the rest of the market.

"That deal has not performed well," he said.

"It probably upsized a little bit too much. I don't think the order book could support the actual $1.5 billion deal. It probably should have been $1 billion," noted the market source.

The issue priced at 98.384, but in secondary trading was down to 98 bid 98.10 offered at 3 p.m. ET.

"There was street selling in Mexico - dealer-driven flows," said another source.

"Who wants to buy a 30-year bond right now with Treasuries at 3.98%?" commented a buyside source.

"It doesn't make sense," he said, but added that there was a lot of interest for the deal.

Bear Stearns and Morgan Stanley ran the offering.

Grupo Posadas expected

In the primary market, Grupos Posadas' offering of $150 million seven-year notes is expected to price Friday, according to an informed source.

"It does have U.S. interest. It's a kind of crossover between emerging markets and U.S. high yield. It's high yield-rated in an investment-grade rated country," said the source.

"They have hotels in Mexico. They also have some hotels in Texas.

"We're seeing interest from both sides."

Citigroup is running the Rule 144A/Regulation S deal for the largest hotel operator in Mexico and Latin America.

Alfa, Naftogaz price

Meanwhile, Russia's Alfa Bank priced its 18-month bonds (Ba2/B/B+) at 99.482 to yield 8 3/8% via Merrill Lynch and UBS.

Also Naftogaz Ukrainy sold a $500 million 8 1/8% five-year eurobond (B2/B+/B+).

ABN Amro ran the books for the Regulation S deal for the Ukrainian government-owned oil and gas company.

And out of Singapore, DBS Bank Ltd. sold $750 million of 5% 15-year non-call-10 bonds (Aa3/A-) at 105 basis points over 10-year Treasuries.

That level was right on top of the Treasuries plus 105 basis points price talk.

Morgan Stanley ran the books. DBS Bank was the joint lead manager.

Cautious tone

The overall tone in emerging markets is one of caution, given that bonds have rallied so much recently, according to the market source.

"And there has been a fair amount of supply, although the market has held up reasonably well to that supply thus far.

"People are probably not optimistic that you can continue to see that positive run right now," he added.

"So people are being a little bit cautious and protecting against any potential correction that could come in the future as a result of supply."

But even amid the defensive moves, the overall picture of investor intentions is mixed, the source added.

"If Mexico can print $1.5 billion in 30-years - that's not necessarily a defensive trade," he said. "I wouldn't think of it being defensive.

"I think people are a little anxious that the rally that has existed for a while on the heels of upgrades out of Turkey and Brazil - that good tone and that euphoria can only last so long," he noted.

The concern is not too much supply in the market as to where issuers are coming in the curve, according to the buy-side source.

"We've rallied a lot. It feels a lot like January and February of this year when Brazil was issuing, Mexico was issuing, everyone was issuing," he noted.

"And they were issuing at the top of the market.

"In that sense, there is a little supply. Treasuries can't go much further. And the risk is to the upside of the yield, so there should be some kind of market correction."

On the other hand, fundamentals are strong, he said.

"But at that point in time [when there is a market correction], I don't think fundamentals count because we wouldn't have seen what we saw in April and May."

Meanwhile the buy-side source is not looking at any new issues in the pipeline, but concentrating on non-dollar issues in local markets.

"I see some value in some that haven't rallied as much with [U.S.] Treasuries or dollar weaknesses."

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.