Emerging market paper firmer; South Africa's $1 billion 10-year bonds well received

By Reshmi Basu and Paul A. Harris

New York, May 24 - Spreads on emerging market debt tightened Monday as investors prepared for a quiet week of trading ahead of Memorial Day weekend.

"There are so many uncertainties out there," said a trader. "The market is sort of moving along with no direction. Everyone is unsure as to whether we've seen the bottom or not."

At late afternoon, the JP Morgan EMBI Index had tightened nine basis points. The EMBI was up 0.09% during Monday's session. Its spread to Treasuries tightened six basis points to 507 basis points.

"The next few issues that come to market will give some clues as to what it will take for investors to wet their feet," he added.

One deal that has raised some eyebrows is Korea Land Corp.'s planned offering of $500 million bonds due 2014, via Citigroup and Deutsche Bank Securities.

Price guidance was set in the area of 125 basis points over U.S. Treasuries.

"The deal is a little tight for some investors," said the trader. "But what people will be looking for is whether this deal will generate enough interest to price in this market."

Another issue that has created some buzz is South Africa's anticipated $1 billion 10-year global bond (Baa2/BBB/BBB).

Price talk of 200 basis points surfaced Monday for the deal, which will be underwritten by Barclays Capital and JP Morgan and is expected to price Tuesday.

One informed source said the sovereign already has a nice-sized book.

Given the investment-grade ratings of the issue, the deal will be a "safe bet," according to the trader.

"I imagine those are the issues that will price in this market.

"With market conditions like this, the story is more about what gets pulled," he added.

The size of South Africa's deal was expected to fall in the range of $750 million to $1 billion.

Gerdau adds to calendar.

Adding to the pipeline Monday is Brazil's biggest steel producer Gerdau SA. Gerdau is planning a $100 million-plus amortizing bond due 2012 via JP Morgan.

The Regulation D deal has a five-year average life.

The San Paolo-based company has operations in Brazil, the United States, Canada, Argentina, Chile and Uruguay.

Brazil, Turkey up in trading

In trading Monday, Brazil and Turkey edged higher.

The Brazilian C bond firmed to 88.313 bid, up from 86.625 bid, 87.875 offered late Friday. Also moving up was the bond due 2040 at 88.20, improved from 86 bid, 86.625 offered at Friday's close.

"Investors are still in the defensive frame of mind," said the trader. "People are reducing their risk because Brazil is the first country to get hit with external shocks.

"And I think the story in Brazil is the balance between politics and economics. There are a lot of signs out there that Brazil's economy may not take off. And Lula's popularity is slipping."

The market will be watching two indicators this week for clues as to the outlook for both president Luiz Inacio Lula da Silva's popularity and the country's economy.

The key employment figures will come out on Tuesday, followed by first quarter GDP numbers on Thursday.

In trading Monday, the Brazilian component of the JP Morgan EMBI Index tightened 35 basis points.

Oil rally - running on empty?

Recent record-high oil prices have been a boon to oil-producing countries such as Venezuela, Russia and Mexico.

However, investors are divided as to whether the oil rally still has some energy to it.

"I think high oil prices should continue to support Venezuela and Russia and help them to outperform the rest of their peers so long as oil is above $35/barrel," said an emerging market analyst.

"That doesn't mean we'll see positive total return numbers out of Venezuelan external debt, just that it should outperform Brazil and Turkey on the way down," he added.

One investor disputed the market consensus that the oil-driven gains in emerging markets debt are over.

"There's some gas left" if the numbers remain above $30 per barrel, the investor said.

But another investor said that higher oil prices translate into higher global prices.

"And that won't be good for emerging markets," he added.

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