Emerging market debt rallies as Brazil leads the way; rumors of new paper from Philippines

By Reshmi Basu and Paul A. Harris

New York, April 6 - Emerging market debt rallied Wednesday as Brazil led the way on news that industrial production had slowed, lifting expectations that its current interest rate tightening cycle is wrapping up.

The Brazilian government said that industrial output fell 1.2% in February compared with the previous month. Also output grew at 4.4% compared with February 2004.

"The market feels a little emboldened that the central bank may now stop raising rates," said a trader. The Selic rate currently stands at 19¼% after seven straight months of increases.

The prospect of no more hikes helped Brazilian paper soar. The Brazil C-bond added 0.687 to 99.937 bid while the bond due 2040 surged 1.9 to 113.10 bid. The long end of the curve saw bigger price action as the bond due 2030 moved up 2½ points to 123½ bid. The bond due 2020 was up 1¾ to 125¼ bid.

Other winners for the day included Russia and Turkey. The Russia bond due 2030 increased 1.62 to 104.27. The Turkey bond due 2030 gained 2¾ to 136 bid.

"Self-fulfilling prophecy"

Another trader added that the last two weeks of March have seen about 10 influential economic releases, such as the Federal Open Market Committee Meeting, non-farm payrolls and two very important inflation reports.

"There were auto earnings. And the list goes on," he added.

"The market was basically fixated on the potential for all of those events to start a sell-off like we had last year at about this time. And it became a self-fulfilling prophecy."

He added that trading volumes were thin at the end of March, given that so many people were out of the office.

"And it became very easy for one medium- or large-size seller to disproportionately sway the entire market," he remarked.

"Volatility is exacerbated at times of thin markets, which is exactly what we had."

GM's impact

"And then you had the GM nonsense," he remarked.

On Tuesday, Moody's cut the ratings for General Motors Corp. All three credit agencies now rate GM at the lowest level of investment-grade.

"One of the reasons that we're rallying today [Wednesday] is that the market was expecting Moody's downgrade of GM," noted the trader.

He said that Moody's decision - it lowered the company one notch, keeping it at investment grade - has given the credit some breathing room, for perhaps another three- to nine- months.

"The market was factoring in the possibility that Moody's would take GM to junk," he commented.

"When that didn't happen, GM spreads tightened by about 15 basis points. Since they were downgraded, GM spreads are 15 points tighter!

"And that has give the market some confidence, and bolstered the mindset of the bulls, that the market had actually gotten too wide," he told Prospect News.

Venezuela's new issue

Venezuela's finance ministry's announced Wednesday that the country's minimum $1 billion issue of 20-year bonds will be priced at par with a 7.65% coupon. This comes in at the tight end of the initial 7.65% to 8.10% yield guidance and the high end of 95 to 100 price guidance.

A research note said that the timing of Venezuela's new $1 billion 20-year issue, targeted towards local markets, is inopportune given the market volatility. But local investors were hungry, given demand for U.S. dollars.

The note added that the new supply has not had a negative impact to the long end of the U.S. dollar curve. There is still a preference for long maturity bonds.

Another research note said that at the 7.65% coupon, the fair price on the bond would be 871/4, where it should open on the market.

The difference, between the offer price and the fair price on this bond reflects the premium being paid by locals. Local investors can buy the bonds in bolivars at an exchange rate of 2,150 per dollar.

Citigroup and JP Morgan are running the Regulation S deal.

Philippines new issue rumors

Meanwhile the Philippines' debt was seen pressured by speculation about a possible new deal.

On Jan. 26, the Philippines priced an upsized $1.5 billion bonds at 98.131 to yield 9.70%, according to a trader.

At the beginning of March, the trader said the bond was at 100.9 bid. About a week and a half ago, it was seen at 95½ bid at its lows.

"Right now that bond is 98.25 on the bid side," said the trader, which is three points off the lows.

"The Philippine 2030 is being held back because there is a rumor that they are going to re-tap it -both the 2015 and the 2030 in the next couple of weeks, he remarked.

"So the Philippines paper has not done as well as some of the other bonds in the high-yield space.

"A lot of the one-off high-yield names that were absolutely getting smoked are now pretty well bid - for instance the Chaoda 2010s are 94.50 bid. They were 91.50 bid not long ago. That is a much shorter bond, which is not impacted by Treasuries as much as something like the Philippine 2030."

The trader commented that "the market is well-bid, and it feels like we are establishing an equilibrium here."

Meanwhile the trader cautioned that a rumored €500 million and €1 billion issue would not be market friendly.

"That's unlikely because there is not the demand for euro-denominated paper like there is for U.S. dollar-denominated paper. It would be tough to place that much euro-denominated debt.

"There are two euro-denominated bonds out there right now, the 2006 and the 2010. And they never trade. They always lag.

"Maybe the Republic of the Philippines is going to pull some rabbit out of the hat. But at the end of the day the financing would cost them more than if they did it in dollars. So why would they want to do it," he argued.

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