Emerging market debt sees another strong session on Treasuries; corporates sell $600 million of bonds

By Reshmi Basu and Paul A. Harris

New York, Nov. 17 - Emerging market debt rode higher Thursday on the back of a three-day rally in U.S. Treasuries.

In the primary market, two corporate issuers priced Regulation S deals totaling $600 million.

Out of Kazakhstan, JSC Bank TuranAlem sold $200 million of three-year floating-rate notes (Baa2/BB-/BB) at 99.724 to yield Libor plus 175 basis points via Credit Suisse First Boston.

And from South Korea, Hyundai Capital Services Inc. sold an upsized offering of $400 million in five-year bonds (Baa3/BBB) at 99.69 to yield a spread of Treasuries plus 113 basis points.

JP Morgan, Merrill Lynch and UBS Investment Bank managed sale.

EM higher on Treasuries, Brazil

Emerging market debt kept on rolling as Treasury yields contracted for the third straight session. The market was also pulled higher as Wednesday's positive sentiment from Brazil carried into Thursday's session, noted market sources.

Investors appeared pleased by Wednesday's testimony by finance minister Antonio Palocci, who pledged to cut the country's budget deficit.

Local markets took comfort Thursday as the Bovespa index moved up 1.98%. The Brazilian real gained 0.64%to 2.19 to the dollar. And prices for Brazil's external debt also rose. At the end of the session, the Brazilian bond due 2040 was up 0.80 to 122½ bid, 122.60 offered.

Wednesday's close of 122 was the highest level reached since before the October sell-off, said a market source, who added that the market reached another high on Thursday.

"We're very, very deep into price highs and into very, very compressed spread levels," remarked Enrique Alvarez, Latin America debt strategist for think tank IDEAglobal.

"It's a very stressed market in a lot of senses, but obviously there is still some demand there," he added.

Meanwhile other credits that rode higher on the back of the gains in Treasuries included Russia and Turkey. The Russia bond due 2030 gained 0.44 to 112.06 bid, 112 3/8 offered. The Turkish bond due 2030 added one point to 147¾ bid, 148¾ offered.

And Indonesia and the Philippines continued their rally.

The Indonesia bond due 2016 added a quarter of a point to 101¾ bid, 102¼ offered. The Philippines bond due 2015 added 0.37 to 109½ bid, 109.87 offered while its bond due 2030 gained 0.63 to 111.12 bid, 111½ offered.

Illiquid market

Sources have noted that the market has turned illiquid, mimicking year-end trading volumes.

Alvarez said that he had met a few "veterans of the Latin American markets" at a recent conference held this week in New York. And those participants shared the same consensus that no one is touching the Brazilian benchmark 2040 bond at a 120 to 121¼ trading level.

Essentially, they held the view that the market is over-priced: "We've been here before. We've seen it. We're not going to get sucked in," is the view, observed Alvarez.

With year-end approaching and such tight valuations, investors do not want to make large changes to their positions and risk a costly mistake, which explains the lack of liquidity.

"You don't take huge positions. You 'nickel and dime' the market to an extent," Alvarez remarked.

Fund see $46 million of outflows

And this week saw capital take flight from emerging markets, according to EmergingPortfolio.com Fund Research. Dedicated emerging markets debt funds showed outflows of $46 million for the week ending Nov. 16. Last week, the asset class saw inflows of $321 million.

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