Emerging market debt settles down, Qatar Petroleum sells $650 million bonds

By Reshmi Basu and Paul A. Harris

New York, May 19 - Emerging market debt was stable Friday, ending a volatile week in which inflation worries sparked a sell-off.

In the primary market, Qatar Petroleum sold a debut offering of $650 million five-year fixed-rate bonds (A1/A+) at par to yield 5.579%.

Citigroup and Credit Suisse were joint lead managers for the Rule 144A/Regulation S deal.

On Friday, financial markets opened a tad firmer. But by the afternoon, U.S. equities gave up gains while U.S. Treasuries were mixed.

Nonetheless, emerging market debt settled down in the wake of Wednesday's thrashing, in which stronger than expected U.S. consumer price index data fueled speculation and worries that the Federal Reserve would continue to lift interest rates.

Spreads were wider by two to three basis points in Friday's session, according to a trader, who added that volumes were light.

During the session, the Brazilian bond due 2040 lost 0.45 to 124 bid, 124.10 offered. The Russian bond due 2030 fell 0.25 to 107.25 bid, 107.50 offered.

The Venezuelan bond due 2027 shed one point to 120.50 bid, 121 offered.

Two schools of thought

For the most part, market participants are divided into two camps as to the health of emerging markets. One camp is optimistic about the market's prospects while the other camp is leaning towards a more doomsday scenario, according to a debt strategist.

"There are people who are like, 'Sell the rally, the world is going to end,'" he noted.

On the other hand, some participants argue that the inflation story is vastly overblown. And since the fundamental story is still intact, investors should buy on dips.

"I can think of one or more investment banks in both camps, so most investors are getting mixed messages," he said.

In order to clear up the confusion, investors have been wading through U.S. economic data, but that too has been sending contradictory signals.

This week's sell-off saw the spread on the JP Morgan EMBI Global Diversified index widen by some 20 basis points, rising above 200 basis points versus Treasuries, according to a market source. This year's gains have been wiped out.

On Wednesday, both local and external markets plunged. The JP Morgan EMBI-Plus index was seven basis points wider at 201 basis points versus Treasuries.

Meanwhile Thursday's session saw a firmer tone on the back of a sharp U.S. Treasuries rally. The yield on the 10-year Treasury note narrowed by 8.3 basis points to end at 4.06%, according to a market source.

Speaking Friday, the strategist pointed out that the market's volatility has been "unsustainably low for some time" and the recent risk reduction was unsurprising.

"We cannot decouple from volatility trends in the big liquid bonds and equity markets," he observed.

Furthermore, he said the commodity story has been the trigger for the recent spread widening. Earlier in the week, oil prices and precious metals saw a sharp decline, which put pressure on Latin American bonds.

"We think that the same hedge funds and other levered accounts - including investment banks that have been highly active in commodity markets, equity markets and fixed income markets - a volatility spike in any of them requires a reduction in balance sheet positioning through standard risk models, and this had to happen at some time," he explained.

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