Day two of emerging market debt bloodbath on Fed hike fears; Slovakia prices

By Reshmi Basu and Paul A. Harris

New York, May 7 - Emerging market debt buckled for a second straight day, as stronger than expected U.S. job numbers ended speculation about whether a rate hike would take place sooner or later.

"It's another ugly day on top of an ugly day Thursday," said a sell-side source.

An investor added that, "Money has been leaving emerging markets, as it has been leaving everything else."

The spread on the JP Morgan EMBI Index moved out, widening 17 basis points to 539 basis points by late afternoon trading.

"We're doing a lot of two-way flow. But I think there are a lot of people just trading the market interday," said the sell-side source.

"We've probably got some day trading going on at this point; the volatility is so high.

"It seems like it's catching some of the other countries besides Brazil today."

Causing the latest plunge was news from the Labor Department early Friday that he U.S. economy added 288,000 new jobs and the unemployment rate fell to 5.6%. Both were stronger than the consensus forecasts. That data prompted some analysts to predict the Federal Reserve could raise interest rates as early as June.

The impact of the employment data was felt immediately as the news "hit the emerging markets three to four points along the curve in Brazil and Colombia," said an emerging market strategist.

"Turkey was also included in the bloodshed," he added.

Brazil's component of the EMBI index widened 42 basis points Friday to 764 basis points.

"Brazil was 53 wider on Thursday," noted the sell-side source. "So it's down almost 100 basis points in two days."

The Brazilian benchmark C bond was at 87.125 bid, down three points from Thursday, while the bond due 2040 was 84¾ bid, 85½ offered, down more than four points.

"The bid-offer on the 2040 is usually a quarter of a point," said the sell-side source. "But right now it's three-quarters of a point.

"It hasn't been pretty."

Turkey's EMBI component widened 54 basis points on Friday - and that follows a widening of 47 basis points on Thursday.

The Turkey bond due 2034 lost 4½ points in trading Friday and its bond due 2030 fell seven points.

"I think that's just catch-up," commented the sell-side source.

Among Friday's notable losers were Russia, Mexico and less-liquid issues.

"Russia is down, although not nearly as much as Brazil," said the sell-side source. "Mexico, I think, has really been underperforming through all of this

"Stuff like Chile and Korea is not as bad, but it's still pretty bad.

"Some of the less-liquid stuff has been pretty hard hit," added the sell-side source.

Peru's new bond due 2016 also took a hit, falling four points.

Panama, Venezuela relatively better

Across the board, most countries felt the pangs of a frenzied sell off. However, a few Central American countries appeared to perform a little better such as Panama and Venezuela.

"In terms of Venezuela, the market expects political volatility in the country, but the good performance in the price of oil which broke close to $40 a barrel benefited Venezuela," said an emerging market strategist.

"Over time, it will help current account payment in the country."

However despite the big plunge Friday, some signs of buying were seen late in the session - as had happened Thursday. While the decline will likely continue Monday, the strategist expects at some points prices will fall enough to bring back buyers.

"At the end of the day, we saw buyers coming in at the short to medium part of the curve, mostly in Brazil," said the strategist. "Still locals are very uncertain and they have not acted.

"We are expecting hedge funds to re-enter the market as prices show some support at these levels," he added.

Investors reducing overweights

A survey conducted by JP Morgan at the end of April showed that investors had substantially reduced their overweights in emerging markets - although they remained overweight on the sector, said the sell-side source.

"I've heard stories about a couple of guys who have substantially increased cash," said the sell-side source.

"There is a lot of discretionary money in our market, which can come in and out pretty quickly. "Everyone always talks about the pension funds, which tend to be long-term commitments of new allocations to the market.

"But when you consider the crossover money, somebody like Alliance or Allstate can put EM in a lot of their high grade portfolios. And it's easy in this kind of market to pull back on that kind of activity," added the sell-side source.

"The question now is, 'Who is going to be the first one out there with a bid?"

"I think there are some investors who are sitting on higher cash levels now," said the sell-side source. "But I think people are pretty cautious."

Holidaying Russia returns to massacre

In the case of Russia, the question is how locals will react on Tuesday, given that they have been on holiday for the last week. They will also be closed on Monday.

"Their first reaction is likely to be total shock because whatever they owned, at whatever price it was before they went on vacation a week ago, is a helluva lot lower now."

"When that happens, and you're retail, is your first reaction to buy more, because it got cheaper? I don't know," added the sell-side source.

While Brazil is cheap, there may be more attractive buys in better countries such as Russia, according to the investor, "where you don't have any need for debt and you have surpluses everywhere so that you can pay back your debt.

"And you have lots of oil.

"I can understand sell offs everywhere, including Russia. But I have a hard time seeing Russia selling off as extensively as we have seen unless everyone is just too long on leverage, in which case you need to unwind those levered positions probably," said the investor.

"You need to ask the hedge funds about that."

Slovakia prices, NCL shelves

The Republic of Slovakia priced €1 billion 10-year notes (A3/BBB+) at 99.44 to yield 4.571% or a spread of 18 basis points over mid-swaps.

Continental asset swappers were big players in the deal, which saw demand of €2.5 billion plus, according to a market source.

ABN Amro, Dresdner Kleinwort Wasserstein, and Morgan Stanley were the bookrunners on the Regulation S deal.

Meanwhile, Malaysia's NCL Corp., a wholly owned subsidiary of Star Cruises Ltd., postponed a planned $350 million 10-year senior notes offering (B2/B+) on Friday, citing market conditions.

JP Morgan had the bookrunning mandate on the deal.

"I think everything that's not single-A has to get pushed back indefinitely, there's no bid for existing paper right now, let alone a new issue," said an emerging market analyst.

"Thailand only got done because it had a strong regional bid and because it offered very short-term floating-rate paper."

The Kingdom of Thailand priced its $1 billion three-year floating-rate notes at 99.94 to yield 6-month Libor plus 13.5 basis points on Thursday

The deal priced on the cheaper end of talk which was six-month Libor plus 12.5 to 13.5 basis points.

Barclays Capital ran the books on the Regulation S deal.

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