EM rallies with Treasuries; High beta Latin America catches bid; China Glass, Telemobil marketing deals

By Paul Deckelman and Aaron Hochman-Zimmerman

New York, July 2 - Emerging markets debt rallied on Monday as the yield on the U.S. government's 10-year paper plunged back down through the 5% threshold.

Latin American debt, suffering from "political noise" as well as from the overall downturn in the market, got some traction.

Meanwhile there was news on corporate deals which are in the market.

The 5% mark

In the secondary sphere, emerging market bonds, which had suffered a rocky week last week, ending off trading for the calendar second quarter and the first half on Friday to the downside, were definitely going the other way on Monday, firming smartly on the back of gains in both U.S. stocks and bonds.

The former rose as a key measure of manufacturing activity showed unexpected strength, boding well for sustained moderate improvement in the American economy, while the latter were also higher,

buoyed by perceptions of the continued softness in the U.S. housing market - which will keep the inflationary fires dampened - as well as a continuation of the "flight to safety" mode in the wake of the terrorist attacks in the United Kingdom over the past few days.

Those factors combined to push Treasury prices higher and yields lower, with the yield on the benchmark 10-year government note shrinking by 3 basis points to close at 4.99%, after at one point hitting 4.98% during the session - the lowest levels the yield on those bonds since June 7.

EMBI notches tighter

Even though Treasury yields dropped, EM bond yields kept pace, resulting in essentially the same degree of risk tolerance by investors, as measured by spreads over Treasuries. The widely followed EMBI+ index of emerging market performance, which tracks EM bond spreads versus Treasuries, was seen having tightened by 1 bp to 174 bps. The index had ballooned outward last week as prices fell, and sits around 25 bps wider than the index's all-time tight levels, seen in late May and early June.

A New York-based trader in Latin American issues declared that "everything was up a little - there were more buyers."

He noted that "in the morning, Treasuries were up" and investors "liked the number that came out," a reference to the Institute for Supply Management's U.S. factory index for June, which unexpectedly rose to a reading of 56 from 55 - the strongest manufacturing pace in 14 months.

Treasury investors shrugged the number off, convinced that the lingering problems of the sub-prime mortgage industry and the larger housing market will keep the economy from overheating; meanwhile the economic expansion implied by the ISM index is seen as good news in the emerging sphere, where many countries area heavily dependent upon exports to the United States to sustain their economies.

The trader said that EM investors "were buying in the morning and then things kind of faded, and then things kind of got bought again at the end of the day."

As a result, he said, spreads "are tighter throughout the market, anywhere from 1 to 15 bps tighter."

Latin America rallies

Major news in the market was seen in Standard & Poor's raising its outlook on Mexico's BBB rated external debt to "positive" from "stable" previously, citing the country's reduced external debt burden and the likelihood that President Felipe Calderon's efforts at reforming tax collection practices will be successful, boosting government receipts.

The average spread on Mexico's debt, as measured by the EMBI+, tightened 3 bps to 93 bps. The yield on the country's benchmark 10-year peso-denominated bonds narrowed 4 bps to 7.65%, its lowest level in two months, while the bonds' price was up nearly half a point to around the 97.3 mark.

Mexico's dollar-denominated bonds due 2017 were also seen better, quoted around 98.4, a ½ point gain, while their yield was seen having come in 7 bps to the 5.85% level.

Elsewhere in the region, the most widely quoted emerging markets bond, Brazil's benchmark dollar-denominated 11% notes due 2040, was up about 1/3 point on the session to end at 131.5.

The volatile high-beta credits of Venezuela, Ecuador and Argentina were also seen recovering smartly from the drubbing they took last week.

Ecuador's 10% notes due 2030 gained 2.5 points on the day to finish at 83.5, while Venezuela's 9¼% bonds due 2027 hit their highest level in a week, up nearly 3 points on the session to finish at 107.

Outside of Latin America, traders did not see much going on. One quoted Korean computer-chip maker MagnaChip Semiconductor Ltd.'s bonds "down a couple of points," its senior floating-rate notes at 89 bid, 91 offered, versus 91 bid, 93 offered previously, and its 6 7/8% notes at 84 bid, 86 offered, about a 3 point drop on the day.

He saw the company's subordinated 8% notes due 2014 at 72 bid, 74 offered, also down 3 points.

Corporates on the road

A market source told the Prospect News emerging markets primary market desk that liquidity is low in the asset class, and the market is not in good shape.

Nevertheless a few new nuggets did circulate during the Monday session.

China Glass Ltd. hopes to price its $100 million offering of five-year notes on or about Tuesday, according to a market source.

The issue has been downsized from $120 million.

Elsewhere Romania's Telemobil is marketing its $125 million seven-year senior secured notes (B3/B-) this week.

ABN Amro and Fortis Investments have the books for the Rule 144A and Regulation S deal.

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