Emerging market debt little moved despite tame CPI numbers; two corporates set talk

By Reshmi Basu and Paul Deckelman

New York, May 15 - Emerging market debt was steady Tuesday as the sector was unable to find inspiration even as U.S. stocks posted a new record high on the back of tame consumer price index data.

In the primary market, India's Bank of Baroda set price guidance for a dollar-denominated offering of 15-year upper tier II bonds (Baa2//BB) at mid-swaps plus 145 to 150 basis points.

The bonds will be non-callable for 10 years. If the bonds are not called, the fixed-rate coupon changes to floating rate and steps up by 100 basis points.

Investor presentations are scheduled to wrap up in London on Wednesday.

Deutsche Bank, Citigroup and Barclays Capital are lead managers for the Regulation S deal.

From Brazil, Sadia Overseas Ltd. set preliminary price talk for its minimum $200 million offering of 10-year notes (Ba2/BB expected) at around 7%.

Brazilian food processing company Sadia SA will guarantee the issue.

Proceeds from the sale will be used to refinance existing debt and to finance capital expenditures.

ABN Amro is the bookrunner for the Rule 144A and Regulation S deal.

The roadshow is scheduled to end on May 17.

EM narrows by 2 bps

Back to secondary trading, the asset class was unable to post meaningful gains Tuesday, even as U.S. CPI data came in weaker than expected.

The Labor Department reported that core consumer prices increased a smaller-than-expected 0.4% in April while core inflation, excluding food and energy, was 0.2%, matching market consensus.

Those numbers suggested that inflation was well contained, helping set off another record-setting session by the Dow Jones Industrial Average. The index gained 37 points to close at a new high at 13,383.84 points.

But the U.S. stock market's gain didn't help the U.S. Treasury market - government bonds edged lower. At the end of the session, the yield on the 10-year Treasury note stood at 4.70%.

Overall market sources described Tuesday's emerging market performance as mixed. On a dollar-basis, prices were firmer while spreads tightened, underpinned by the weak performance in U.S. Treasuries.

During the session, the JP Morgan EMBI+ index rose 0.04% while spreads narrowed 2 basis points versus Treasuries.

"On the sovereign side, we had a laggard's rebound essentially," commented Enrique Alvarez, Latin America debt strategist for think thank IDEAglobal.

Argentina and Venezuela, which have been this year's worst underperformers, were able to recover on the back of short-covering and perhaps some bottom fishing, noted Alvarez.

"The market really has no momentum attached to it whatsoever," he said, adding that even though the Dow Jones Industrials have pierced new highs on several different occasions that momentum has not infiltrated into the Latin American debt market.

That lack of reaction, suggests that for now, the market is done on the upside, remarked Alvarez.

Over the last several sessions, the market has sort of languished at current levels. For instance, Brazil has been unable to forge ahead from current levels, suggesting that the sovereign is overdone.

"At this point in time, the market is still somewhat comfortable with positioning. However, I don't think there's a whole lot of appetite for additional pulls on the upside," Alvarez added.

Furthermore, he pointed out that the current run up in U.S. stocks is luring allocations from the emerging market fixed-income class.

That competition has also capped the market's ability to break through current levels.

Philippines steady

Philippines bonds were seen mostly steady to just slightly higher, the market apparently unfazed by the results of gubernatorial and local elections on Monday in that country.

A New York-based trader in Asian issues said that he had not really seen much fallout from the elections in the performance of the Philippine bonds.

"We're still in a situation where the cash markets are very well supported. Even with Treasuries having sold off 3 or 4 basis points today, we haven't really seen any reaction on the cash side, so spreads have tightened a commensurate amount, and some - but on very light flows."

He said that the CDS contract linked to Philippine government debt was "unchanged - perhaps marginally better bid [versus] the past three or four days, post-elections, but nothing too dramatic."

He estimated that the five-year contracts were trading at 108-110 bps, about where they had been.

Earlier in Asian trading, the benchmark 2031 bonds were seen trading slightly above the 114 level and the 2032s a bit north of 98, both marginally higher on the session.

In those elections, the opposition parties took control of the Senate - but parties loyal to president Gloria Macapagal Arroyo were seen retaining control of the House of Representatives, thus roadblocking any opposition attempts to remove Arroyo.

Turkish debt tighter

Elsewhere, CDS spreads on Turkish debt were seen about 4 bps to 5 bps tighter, the trader said, in the low 150s area. That paralleled Monday's better showing by the government's lira-denominated benchmark bonds due 2009, whose yield tightened by nearly 20 bps, unaffected by continued political tensions in that nation. Over the weekend, a massive rally by secularists - by some estimates as many as 1.5 million - in the city of Izmir - was designed to send a message that they would not tolerate any attempts to increase Islam's influence in Turkey, a position shared by powerful elements within the Turkish military and judiciary.

Tensions over the possibility of a president perceived to be pro-Islamic being elected by the country's parliament almost came to a head in late April, until the nation's highest court set aside the results of the preliminary round of parliamentary voting. New legislative elections are scheduled for late June, with the ruling AK Party hoping to win a mandate from the voters for its efforts to put the election of the president in the hands of the electorate, rather than Parliament.

Pakistan widens on political risk

In other Asian dealings, the trader said that CDS spreads on Pakistan government debt were about 20 bps wider at around the 190 bps level on "geopolitical concerns," as anti-government rioting shook the southern city of Karachi, leaving nearly 40 people dead.

The riots were sparked by President Pervez Musharraf's decision to suspend the country's chief justice, Iftikhar Chaudhry - a move that ignited the worst political street violence in years. Adding to the unrest, a bomb blast in a hotel in the northern city of Peshawar killed another two dozen people - an attack possibly linked to the government's attempts to crack down on fugitives linked to the ousted Taliban government in neighboring Afghanistan.

While the 5-year CDS spreads widened substantially, "there hasn't been that much reaction in cash [bond prices] for the moment, not much selling on the cash side."

New Citic bond active

On the Asian corporates front, the new Citic Resources Holdings Ltd. 6.80% bonds due 2014, which priced on Monday, were being actively traded on Tuesday.

The trader called the billion-dollar mega-deal "the biggest sub-investment-grade corporate from Asia," excluding the recent even larger Freeport-McMoRan issue "which people don't really even see as being much of an Asian credit anyway." The new Citic notes, which priced at 99.726 on Monday, spent most of the day Tuesday trading in a 99.75-99.85 bid range.

In Latin American dealings, Brazil's real-denominated bonds firmed as the currency unit broke through the psychologically important 2-for-a-[US] dollar mark, strengthening to 1.982 reals per dollar, its most potent level since February 2001. That caused the yield on the government's benchmark zero-coupon bonds to tighten by 5 bps to around 11.49%.

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