Emerging market debt holds up despite Treasuries decline; Turkey sells $1 billion; funds gain $2.2 million

By Reshmi Basu and Paul A. Harris

New York, Sept. 30 - Emerging markets debt held its ground despite a fall in Treasuries, narrowing spreads in a slow trading day.

Meanwhile, the Republic of Turkey tapped the capital markets for the second time this month, this time bringing $1 billion of 10.5-year bonds.

"It's a very quiet afternoon - just 'cause it's month-end," said a trader.

Despite a poor performance by the U.S Treasury market, emerging markets debt was firm during Thursday's session, he said.

"Treasuries kind of went down today [Thursday].

But as emerging markets are concerned, "it's pretty much good technicals in the market - not really driven by the U.S. economy today [Thursday], he noted.

Brazilian paper was up on the day. The C-bond was bid at 98.937, up 0.312, while the bond due 2040 was bid at 112.10, up 0.55.

"Brazil is doing fine today [Thursday]," said a buyside source. "Apparently, there was some local demand early this morning.

"Obviously, the [U.S.] Treasuries came off, but Brazil was hanging in there.

"And it's actually tighter on a spread basis just because of the sell-off in the Treasuries, but it held on the dollar price.

U.S. Treasury prices took a hit Thursday as data on consumer spending and regional manufacturing negated any hope that the Federal Reserve would slow down the pace of interest rate hikes.

The yield on the 10-year Treasury note rose to 4.12% from 4.09% on Wednesday.

Turkey's $1 billion drive-by

The Republic of Turkey surprised the market Thursday with its second tap in the month of September, coming ahead of the release of a European Commission report on whether or not the European Union should engage in talks about Turkey joining.

The country sold $1 billion of bonds due 2015 (B1/BB-) at 98.573 to yield 7.45% via Citigroup and Morgan Stanley.

"The new deal was trading pretty well in the gray market," said the buyside source.

The 2015s were trading at plus 0.35 in the gray, according to the source.

"The book was oversubscribed, but I didn't find it particularly cheap. But it seems that demand was pretty good."

In other news out of Turkey, Moody's raised its local currency debt rating to B2 from B3, citing improvement in the country's public sector debt.

On Sept. 10, Turkey priced €600 million of notes due 2009 (B1/BB-/B+) at 98.94 to yield 5¾%.

JP Morgan and ABN Amro ran the Regulation S bond offering.

Venezuela's new bond eases

Venezuela's new global bond eased slightly in trading Thursday but sentiment was still seen as positive on the issue.

"They are trading very, very well," said the buyside source. "The book was several times oversubscribed

"There was a lot orders for the cash part of the bond. It came at a price of 95 and change. It was trading at 97¾ yesterday [Wednesday]."

"So there was some profit-taking at that level, but the bond is so cheap to the curve that a lot of accounts actually tried to buy it in the secondary," added the source.

The source also added that several dealers were recommending the issue.

On Wednesday, Venezuela priced $1.5 billion of global bonds due Oct. 8, 2014 to yield Treasuries plus 520 basis points.

The Latin American country issued $710 million of its 8 1/ % global bonds due 2014 in an exchange for Brady bonds. The remaining $790 million was sold to investors for cash.

Barclays Capital and Merrill Lynch & Co. were lead managers.

During Thursday's session, Venezuela's bond due 2014 was trading at 97.40 or 473 basis points over the 10-year Treasury.

Venezuela's bond due 2027 added 0.15 to 98.55 bid.

Funds see $2.2 million inflows

Emerging market bond funds took in $2.2 million of cash in the week ending Sept. 22, according to EmergingPortfolio.com Fund Research. This is the eighth straight week of inflows, during which time these funds have pulled in a total of $411.7 million.

Inflows are $603.9 million for year-to-date, which is 3.77% of their beginning of year total assets.

Global bond funds had inflows of $389 million in the week, the ninth consecutive week of inflows. These funds have $4.07 billion of inflows year to date.

Looking ahead, IMF meeting

The market is expected to be slow heading into this week's International Monetary Fund meeting.

Last year at the meeting, Argentina announced its restructuring proposal over its $100 billion defaulted debt, much to bondholders' chagrin.

"I think the two main things that everyone wants to hear is the extent to which Argentina is going to improve its debt offer," said the buy-side source.

"And I think everyone wants to get a feel for the global environment, interest rates" and whether emerging markets are moving into a friendly or non-friendly environment, added the source.

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