Emerging market debt up after two-day slide; ADB prices $1 billion 10-year global bonds

By Reshmi Basu and Paul A. Harris

New York, Oct. 14 - Emerging market debt regained momentum Friday after two straight days of losses on profit taking.

"No one really has a good idea of where the market is heading," said a trader. "The market is a little nervous."

Friday served up a mixed bag of economic news. U.S. industrial output rose by a less-than-expected 0.1% in September, as hurricanes took their toll. But retail sales had a large gain in September, rising 1.5% compared with a 0.2% drop in August.

Those retail numbers spooked the U.S. Treasury market. Government prices declined on concerns that the Fed would continue with its measured pace rates increase. With the recent slew of soft economic data, some investors had been betting that the Fed would skip out on hikes at the next FOMC meeting.

The yield on the 10-year bond was down to 4.01% from 4.06% on Thursday.

Paper from Brazil recovered from its recent losses in Friday's session. The C bond added ½ to 99 1/8 bid while the bond due 2040 was up 0.95 to 113.15 bid.

Mexico's bond due 2008 gained 0.40 to 114.65 bid.

Oil producers Venezuela, Ecuador and Russia saw gains on climbing oil prices. The Venezuela bond due 2034 was bid at 1021/4, up 0.85. The Ecuador bond due 2030 gained 1¼ point to 86½ bid. And Russia's bond due 2030 was bid at 98.812, up 0.062.

Overall, the JP Morgan EMBI+ Index rose 0.16%. Its spread to Treasuries tightened seven basis points to 412 basis points.

ADB prices

In the primary market, the Asian Development Bank sold $1 billion of 4.25% 10-year global bonds at 99.252 to yield 23 basis points over the 4.25% U.S. Treasury note due August 2014.

Citigroup, Daiwa SMBC and UBS Investment Bank ran the books.

The deal was the Asian Development Bank's first dollar-denominated global bond since January 2003, when it priced $1 billion 2 3/8% bonds due 2006, according to an ADB news release.

The bank said that volatility in the Treasury market since the beginning of the year has kept issuance of 10-year bonds infrequent.

However, lately 10-year paper seems more attractive.

The order book was $1.2 billion.

Out of the total, 45% of the bonds were placed in non-Japan Asia, 21% in Japan, 20% in the United States and 14% in Europe.

By investor types, 42% of the bonds went to central banks and government institutions, 36% to bank treasuries, 18% to fund managers and 4% to others.

Oil prices hit $55

Oil prices hit another record-high of $55 before closing at $54.93 a barrel on the New York Mercantile Exchange. Emerging market paper, especially Brazil, has taken a hit this week as oil prices hovered at levels over $50.

But one buyside source said the oil run up has more shock value than anything else.

"I don't know how to incorporate that [oil prices] into emerging markets because everyone typically says that oil is good for emerging markets," said the buyside source.

"And it is for some, but bad for others.

And while Brazil and Bulgaria are net exporters, "it's a great headline but there's usually less to it," he said.

For now, the market will see divergent reactions to high oil prices, as the levels impact different markets, according to a second buyside source.

"The Asians certainly suffer a little bit from that. Brazil suffers but not enormously.

"What I say is that those who should be doing well with high oil prices have certainly done okay but the prices haven't transferred to asset price increases in countries like Russia.

"Venezuela has done okay, But Russia should be doing much better if there was some very strong linear correlation and certainly that has not happened.

Russia's relatively week performance "goes back to the Aries deal and the Yukos situation and maybe the undemocratic moves from [Vladimir] Putin".

The Russian government is expected to sell the main subsidiary of embattled oil company Yukos by the end of the month at a price far lower than its estimated worth.

In July, Russian paper sank as Germany repackaged Russian Paris Club debt. Aries Vermogensverwaltungs GmbH issued €3 billion and $2.4355 billion in new securities.

Where is the market heading?

Investors' attempts to figure out where the economy is heading soured the tone in emerging markets Wednesday, with sharp moves in the currency and oil markets, according to the second buyside source.

"The first engine of growth is sputtering now for awhile. The second engine of growth we all thought was maybe slowing down, but certainly not sputtering, and maybe now we are saying that."

But the slowdown is not the reason why there would be a market correction, according to the second buyside source.

"The market is not that horrible," said the source. "I don't subscribe to that idea but maybe that's what the market was saying when China's commodity prices sank and oil prices took a dive."

With spreads so tight in emerging markets, the consensus is that something must give because the current rally cannot last forever.

According to the buyside source, everything that goes up, must come down.

"I subscribe to that idea, that the story has been good and it's hard to see it continue for much longer. It shouldn't get too bad but why should it do so well.

"Brazil was the darling. And it's hard for me to see Brazil continue to be the darling.

"However, it is still outperforming," he noted.

Even though prices are off the pace of U.S Treasuries, the fundamental situation is pretty good, according to the first buyside source.

"It's just that you get mathematical limits on these bonds as to how high they can go.

"Corrections just tend to come. They are always hard to foresee.

"If U.S. Treasuries were to come under pressure than obviously emerging markets at some point would come under pressure," he commented.

"There not a lot of idiosyncratic risk at this point. There are no countries that are in the intensive care ward that we are worried about.

"That might change. But for now, we are really concerned about that."

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