Emerging market debt dragged down by technicals; Argentina's debt swap shrouded in mystery

By Reshmi Basu and Paul A. Harris

New York, Jan. 10 - Emerging market debt slid Monday on anticipation of new supply in January.

Techicals have been a drag on the mood of the market since the beginning of the year. Furthermore, Monday's trading was dampened by comments made by Atlanta Federal Reserve president Jack Guynn Monday after he said a "measured pace" of rate hikes was "not a pledge."

"The market has been spooked a little bit by the expectations that there is going to be new inventory coming out," said a Latin America debt strategist at Refco EM.

"At the beginning of the year, companies and countries need to start thinking about refinancing needs and they usually use the first couple of weeks of the year to start issuing more paper," he remarked.

This is even more so the case, given how strong the tone of the market was at the end of 2004, he added.

EM down

Early morning trading was reasonably busy, said a sellside source.

"Things are a little weaker. We have seen some selling of the long end of the Brazil curve," said the source.

"The market is in a kind of 'Catch 22' position where, if it performs well enough, people feel as though you are going to see a fair amount of supply. So I think the market is almost destined to price itself for some supply," added the source.

"If the market is really a mess - in other words, if something external is driving it - then the supply holds off.

"But if the market is constructive, I think the supply is going to come."

This week, Poland and Turkey are expected to price new sovereign paper, added the sellside source.

"It appears as though Turkey will do something this week, but it is not apparent whether it will be dollars or euros."

Investors are anxiously awaiting paper from Brazil, Turkey and the Philippines, on the non-investment-grade side, said the sellside source.

"Turkey is easier because their issues tend to get a lot of local demand, anyway.

Looking at Brazil's plans

"Brazil is the question. It bears the brunt of the volatility just because people reflect their whole market sentiment upon Brazil faster than on anything else. So it is more volatile than anything else.

"It makes it tough for them to do a deal right now unless they do something more defensive," noted the sellside source.

Meanwhile, the timing of Brazil's expected real-denominated deal is not imminent.

"Our assumption is that that deal is still coming as some point, but that it will take a while to get it done," said the sellside source.

"Brazil real deal has not been mandated."

Those supply concerns were reflected in the price action in Brazilian paper Monday. The Brazil bond due 2040 lost 0.85 to 113¼ bid while the bond due 2030 fell 2¾ points to end at 124¼ bid.

"There is a belief that more supply will cheapen prices. It's simple supply and demand," said the Refco strategist.

"Depending on the deal, you will see some sort of asset allocation in which a fund manager believes there is some value in the new issue and goes ahead and sells an old issue, which adds to the selling tone," he said.

Other losers in trading Monday included Mexico, Russia and Turkey. The Mexico bond due 2009 fell 0.20 to 121.55 bid. The Russia bond due 2030 dipped a quarter of a point to 101½ bid. The Turkey bond due 2030 lost 2.38 to 139.87 bid.

"The market has been under pressure in the last couple of days" and will most likely remain so until the end of the week, said the strategist.

Meanwhile, in terms of liquidity, crossover buying has been a factor, according to the sellside source.

"The big factor has been the strategic inflows and those go to a lot of the dedicated funds. But it is typically separate money that is managed by the dedicated funds; it does not get counted in the fund total.

"If an asset manager has an emerging markets debt fund that gets an inflow for a pension company, that doesn't get counted in the inflows."

Argentina's mystery debt offer

This week, Argentina will kick off a roadshow in Miami in hopes of luring investors to participate in the exchange offer for its $100 billion of defaulted bonds. The country has offered to swap about $102 billion of unpaid bonds for up to $41.8 billion in new securities.

Argentina continues to be tight-lipped about the debt exchange, disclosing little information to the market.

"This week the country is going to start a roadshow in all the locations where they think there are a lot of investors. They are going to be in the U.S., they are going to be in Europe," commented the strategist.

"The domestic perception in the U.S is that about 50% of investors will get involved in the exchange. In Argentina, it's a little bit higher."

Most believe that the participation rate will run between 65% and 75%, he added.

"There has also been interest on the peso-denominated issue that before did not have such a strong interest."

He said the possible demand "makes sense" for people who consider that the dollar will keep on depreciating and that Argentina will have a strong inflow of dollars and exports.

"That's what I've been seeing in the market today [Monday]. I think this is going to remain a mystery until the last minute," he remarked.

Many holders of the defaulted bonds are crying foul play, saying that Argentina has not negotiated in good faith over its defaulted debt from more than three years ago.

In June, the country offered to give 25 cents per dollar of defaulted debt.

The debt exchange is expected to start Jan. 14 and run through Feb. 25.

The Argentina bond due 2008 fell ¾ of a point to 32 bid in trading Monday.

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