PPI numbers sting emerging market debt as Treasuries tumble; America Movil's new bonds tighten

By Reshmi Basu and Paul A. Harris

New York, Feb. 18 - Emerging market debt felt the squeeze from stronger than expected producer price index data - but it still outperformed the slumping U.S. Treasuries market Friday.

In a shortened session, Treasuries were slammed by PPI data, which showed that core inflation is rising at its quickest pace in six years. Core PPI rose 0.8% in January, coming way above the expected 0.2% increase.

The yield on the 10-year Treasury note jumped to 4.26% from 4.18% on Thursday.

But with an early close ahead of the holiday weekend, emerging market prices were sheltered from the full-blown effects of the Treasuries slump.

"The market is pretty quiet. A lot of people didn't even come in today [Friday]," said a sellside source.

"For anyone who did, the producer price index has quieted them down a little bit. The core was up 0.8%, which was well above expectations. And Treasuries have really tanked."

"Our market is holding in. It is outperforming Treasuries. It's a little tighter. But there is nothing special that is moving things around," note the sellside source.

Nonetheless, PPI data pinched emerging market sovereign prices, particularly impacting the long part of the curve. At late afternoon, the Brazil C bond was quoted at 102½ bid, down a quarter of a point while the bond due 2040 lost 1.10 points to 116.80 bid. The Ecuador bond due 2030 was spotted at 92.90 bid, down 1.40. The Turkey bond due 2030 was seen at 143¾ bid, down 1¼ points. The Venezuela bond due 2027 was quoted at 103 bid, down 0.80.

The PPI numbers also moved Federal Fund futures rates, indicating expectations of more interest rate increases.

"Year-end fed funds are now at 3.65% or so. And it was running in the 3.50% to 3.55%-range. So the PPI news has pushed it up a little bit," added the sellside source.

Narrow ranges ahead

While the PPI numbers depressed market sentiment for the day, debt will continue to trade in narrow ranges, sources said. But an upcoming slew of economic data may finally give bonds the direction needed to break the shackles of range bond trading.

"The market is definitely too rich, and the bad PPI numbers this morning [Friday] have forced at least a few investors to rush for cover," said an emerging market analyst.

"Still, we're going to need more than just one bad inflation data point to break EM out of its trading range.

"Next week could be a big week - we've got U.S. CPI, durable goods, FOMC minutes, and then jobless claims. The market will be worried that one or more of the data releases next week will confirm the bad news from today's [Friday's] PPI," he commented.

Happy EM market, says investor

However, one bad number does not spoil emerging markets, given that country fundamentals are strong, according to a buyside source.

"This is a market that is happy," he said. 'It's in a party mood."

As evidence, inflows into the asset class have been positive, he noted.

"Looking at it from top down, there's still a lot of liquidity in the market. And liquidity is chasing yield."

The challenge ahead is finding the best place for yield on a risk-adjusted basis, he commented.

"In a global environment, where growth is still there, where inflation is not extremely high, where commodity prices are high and will probably remain relatively high, emerging markets should do well."

Furthermore, emerging market economies are improving as well as their debt profiles, he said.

"As long as rates don't go high or very fast in the U.S., it's still nice to have money in this market."

It will take more than an ailing U.S. Treasuries to derail the market, he observed.

"Yields on the long bonds here are very, very low. It will have to be a change in tone and a change in the pace of the Fed hiking rates. At least, it doesn't appear to be happening yet.

"Issuance in the market seems to be gobbled up all the time," he noted.

America Movil tighter in secondary

One new deal that investors ate up was America Movil's new issuance via Credit Suisse First Boston. The Latin American mobile telephone company priced an upsized $1 billion 30-year notes (A3/BBB) at 99.667 to yield 6.40% or a spread of Treasuries plus 184 basis points.

Demand was so high that the deal was increased from $500 million.

In the secondary, it was bid at 183 basis points over Treasuries and offered at 180 basis points Friday, tightening one basis point from the issue spread.

Meanwhile, Mexico's bond due 2034 was spotted at 191 basis points over Treasuries, widening two basis points.

Just like America Movil, issuers should be tapping the long end of the curve whenever they can, recommended the buyside source.

"They should do that as much as they can because that part of curve will become much more expensive."

Philippines on two-notch downgrade

Philippines' sovereign paper survived the unexpected two notch downgrade by Moody's, according to the sellside source.

"Their bonds never tanked. In general we saw better buying afterwards because people figured that the worst is over," the source said.

"Not everybody thought they were going to get downgraded by two notches. But I think that once people saw it they figured that now Moody's is not going to have to do anything for a long time," noted the source.

Moody's downgraded Philippines' long-term foreign- and local-currency ceilings and ratings last Wednesday by two notches to B1 from Ba2, citing high levels of government and external debt.

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