Emerging market debt trades sideways; continuing Mexican political troubles

By Reshmi Basu and Paul A. Harris

New York, April 7 - Emerging market debt was slightly softer Thursday, while investors paid close attention to how the political strife in Mexico will play out.

The market is "still driven by hedge funds and trading in fast money," said a buyside source.

"I don't think real money accounts have been involved so far. That's why there's hasn't been a lot of consistency," the source said.

Trading was mixed during Thursday's session. The spread on the JP Morgan EMBI+ tightened by two basis points to 375 basis points more than Treasuries. The Brazil C bond was down 1/8 of a point to 99 3/8 bid while the bond due 2040 lost 0.15 to 112.65 bid. The Ecuador bond due 2030 gained ½ a point to 90.10 bid. The Turkey bond due 2030 was unchanged at 135 ½ bid.

"We've had a pretty good run overall. And certainly I think we've seen different markets a little more sideways today [Thursday]," said a sellside source.

"It depends on the specific asset you are looking at. The EMBI+ is still three tighter on the day," but the source said that move masked a variety of changes in the underlying bonds.

The source added: "It doesn't feel like there's a whole lot of volume in any case."

The sellside source also noted that U.S. Treasuries had sold off quite a bit. The yield on the 10-year note stood at 4.47% by the end of the session, up from 4.44% at Wednesday's close. In the morning, the yield had touched as low as 4.40% before moving higher.

"I think, in general, just as in the Treasury market - when we hit the highs in the market, some people probably started putting new shorts in the market," commented the sellside source.

Mexico's noise becomes focus

The buyside source said the main issue to follow was the likely impeachment of leftist Mexico City mayor Andres Manuel Lopez Obrador.

Obrador formally declared his presidential candidacy Thursday as he called on tens of thousands of supporters to back him with peaceful demonstrations.

"We are about to see an attack against the democratic advances that have been won with so much sacrifice by the people of Mexico," Obrador told his supporters.

The rally came hours before congress votes on whether to lift his immunity from criminal prosecution, which would block him from a presidential run in 2006.

Last Friday, a legislative committee recommended that the popular mayor should be stripped of his immunity so that he can face charges that he ignored a court order to stop construction of a hospital access road on private land.

The buyside source added that the local market in Mexico, such as bonos, rallied on the view that the worse case scenario was already priced in.

"I think the external debt hasn't reacted yet, which it probably should have.

"It's probably a function of the fact that Mexico is a very important holding for crossover investors and they have been really focused on GM and autos.

"I don't think they really paid attention to what was happening in the political scene in Mexico."

The source added that if Obrador is impeached, which is a likely outcome, there will likely be more selling of Mexico's external debt.

At press time, there was no vote by congress.

Russia could pass Mexico

On a spread basis, Russia and Mexico were only eight basis points apart Wednesday. Many have said that there is a probability that Russia will trade through Mexico, remarked the sellside source.

Over the long term, even if Mexico had been tighter and even if the current round of political volatility in Mexico quiets down, noise in the country will intensify as the 2006 presidential election approaches, remarked the source.

"In the meantime, especially with the oil price outlook staying higher, Russia is going to continue to look better," commented the sellside source.

The source added that the technicals in the market suggest that such a scenario of Russia trading through Mexico could happen - whether it be tomorrow or six months from now.

However, the buyside source said there is a real possibility that Russia could trade flat to Mexico.

"The opposite thing happened in Russia. We had positive news yesterday [Wednesday] about the government's intention to pay down their external debt by 2007 using oil money.

"At the same time, there were some rumors that the Paris Club may agree to a deal with them - allowing them to retire their debt at least at par," she said.

The buyside source does not think the political situation in Russia is any better than Mexico. The situation in Russia is slowly deteriorating.

"But I do think that Russia's macroeconomic fundamentals are a lot better than Mexico's. But there is a balance there, but probably Russia could trade flat to Mexico pretty soon."

Tenaga in the market

Malaysian power company Tenaga Nasional Bhd. may be headed to the international bond market for some of the cash it needs to fund the tender offer it announced on Thursday.

One source added that Tenega would be wise to issue borrowings in ringgits so that it stays in line with its strategy of reducing the amount of foreign currency debt as a percentage of its total debt.

Also in the pipeline are deals from Chile's Celulosa Arauco y Constitucion SA and Mexico's TFM, SA de CV.

The sellside source commented that "people are watching to see if some of the bigger sovereigns start to come like Indonesia or Uruguay or someone like that," which are slightly more challenging deals.

"I think emerging markets has really outperformed the broader markets for probably a good week or so. An awful lot of it is more a function of the tone of the broader markets, so I think EM is getting more and more comfortable.

"I think it still takes a large new issue premium than it would have a month ago."

Forestry company Arauco is planning to issue $300 million of 10-year bonds (Baa2/BBB+/BBB+). JP Morgan is running the books and Citigroup is the co-lead. BBVA Bank, BNP Paribas, Calyon and Banco Santander are also part of the syndicate.

And freight railroad company TFM is in the pipeline with an offering of $460 million senior unsecured notes in two tranches (expected ratings B2/B). Morgan Stanley has the books.

Hylsa calls

Meanwhile one analyst is keeping the 10½% notes due 2010 of Mexican steelmaker Hylsa SA de CV (B1/BB-) at market weight after the company said Wednesday it will redeem all $139 million of its 9¼% 2007 notes on May 12 at a price of 101.54.

According to a research note, Hylsa has obtained a bank loan to finance the prepayment.

The analyst expects the company to also redeem its 10½% notes, which are currently callable at 101.5417, declining to par on Sept. 15, 2005.

The recommendation is thus market weight, since the 2010 bonds are trading above the current call price, said the note.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.