Emerging market debt off as Treasuries slide, Turkey's new paper lackluster; URC adds $125 million

By Reshmi Basu and Paul A. Harris

New York, Jan. 14 - Emerging market debt fell hard Friday, weighed down by a decline in U.S Treasuries and new supply from Turkey. Meanwhile Argentina launched its much awaited debt swap.

Treasuries slipped Friday during a shortened trading session, spooked by hawkish comments from a Federal Reserve president and a mixed bag of economic data.

Late Thursday night, St. Louis Fed president William Poole said the Fed would have to remove the wording of "measured" pace from its statements at some point. Economic data added support to his comments. Industrial production data came in stronger than expected at 0.8% in December.

However, there was contradictory data as well - wholesale prices dropped last month.

In reaction to the news of the day, Treasuries fell hard. By the time trading wrapped up, the yield on the 10-year note stood at 4.22% from 4.16% at Thursday's close.

During Friday's session, emerging markets was "a lot softer," said a trader.

"Treasuries have a lot to with it," the trader said. "They went down and took emerging markets with it.

"There was a good amount of volume in Brazil, not much else really traded in the Street. But Brazil was pretty actively traded," he noted.

Across the boards, sovereign prices were down. Brazil's C bond fell 0.313 to 101.062 while the bond due 2040 lost 0.65 to 113.95 bid. The Ecuador bond due 2030 slipped a quarter of a point to 87 bid. The Mexico bond due 2009 dropped 0.20 to 121.60 bid. The Russia bond due 2030 lost 0.255 to 103.12 bid. The Venezuela bond slid 1.10 to 103 bid.

Both local and larger institutions were buying and selling during the session.

"They are trying to get their positions straightened up and see how we go after the long weekend," the trader remarked.

Turkey blamed

Furthermore, new supply from Turkey wore down emerging markets, according to a sellside source.

"The market was softer on the back of the massive Thursday issuance from Turkey," said the source.

The Republic of Turkey priced an upsized $2 billion of global bonds due 2025 (B1/BB-/BB-) late Thursday at 98.507 to yield 7.52%. Citigroup and Morgan Stanley were bookrunners.

"Turkey trashed the market," observed the source, who spotted the new sovereigns in a 97¾ bid, 98¾ offered market.

The 97¾ bid was the day's low, according to a second sellside source.

"When Turkey raised the offer to $2 billion the market dropped like a rock, even though there was $14 billion in the book," said the first sellside source.

"People understood that Turkey intends to raise $5.5 billion this year, but I don't think they expected them to do that much in one deal.

"When they upped that 20-year piece of paper to $2 billion some good institutional investors dropped out," noted the source.

The second sellside source said that the new bond may have traded down because investors were hedging their positions. In general, the whole curve for Turkey was down.

The Turkish issue most hit was the bond due 2030. It dropped two points to 140¾ bid, yielding 8.061% or a spread of 341 basis points over Treasuries.

"The '34s are down 1 7/8 for a yield of 7.867 at a spread of 322," according to the source, who quoted prices for the London close. The spread widened 19 basis points on the day.

The new bond due 2025 was bid at 98 1/8, down 3/8 from the issue price.

"And they traded up at the end of the day," he said. "They reached lows of 973/4.

"I guess it's just movements among portfolio managers regarding the new one and also to digest the new supply."

The first sellside source added that Thursday's sale of sovereign bonds by Turkey brought to mind last year's upsized $1.5 billion of bonds due 2034 by Brazil, which sold into $10 billion of investor demand but ended up having a similar impact on the market.

Meanwhile, Brazil and Venezuela are expected to tap the market soon. Venezuela has already sent out RFPs.

"And they are looking for a benchmark deal either in U.S [dollars] or euro," said the second sellside source.

URC Philippines add-on

URC Philippines Ltd. (Universal Robina) priced a $75 million add-on to its 8 ¼% notes due Jan. 20, 2012 (Baa3/BB) at 99.199 to yield 8.45%.

"Once URC Philippines saw that they had no trouble getting $125 million done they immediately wanted to raise more money at the same rate," said the first sellside source.

The terms were identical to those of the original $125 million issue that priced two days earlier. The add-on brings the total issue size to $200 million.

Credit Suisse First Boston and JP Morgan were the bookrunners.

The issuer is the food unit of Philippine conglomerate JG Summit Holdings Inc.

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