Emerging market debt off on interest rate concerns; Argentina down

By Reshmi Basu and Paul A. Harris

New York, Jan. 18 - Emerging market debt stood on volatile ground Tuesday as investors anxiously awaited comments this week from key Federal Reserve officials for clues on the future pace of interest rates.

In the primary market, Pakistan came to market with Asia's first sovereign issue of 2005. Pakistan priced $600 million of five-year Islamic bonds (/B+) at par to yield Libor plus 220 basis points.

Citigroup and HSBC ran the books for the Regulation S deal.

Also, there has been strong interest over the long weekend for Banco Itau SA's $100 million three-year bond offering (Ba2/BB-), according to a market source.

There has been "good momentum from institutional and PB accounts," said the source.

Itau Bank and ABN Amro are running the Regulation S deal. The deal is expected to price Wednesday.

EM down

During trading Tuesday, investors were unwilling to take on more risk as Brazil led the downturn in Latin America.

On Wednesday, the monetary policy committee (Copom) may hit the market with another increase to the 17¾% Selic rate.

"People are expecting 50 basis points and I think that's cooling sentiment a little bit in Brazil," said Enrique Alvarez, Latin America debt strategist for IDEAglobal.

"Then you had a run-up in the dollar and a small depreciation in the real.

"I believe that's related to some currency fixing for some expirations."

Investors set out to manipulate the average exchange rate, which will be used to settle $326 million in government debt Wednesday. The real is expected to depreciate further as another $1.243 million of debt will mature on Thursday.

"A less positive tone in the real also led to a less enthusiastic buying of Brazilian debt," he said.

The Brazil C bond lost 0.255 to 100.87 bid while the bond due 2040 fell 1.15 to 112.85 bid. The Mexico bond due 2009 fell 0.30 to 121.35 bid. The Venezuela bond due 2027 slid 1.10 to 101.90 bid.

"I think more than anything that the market is concentrating on U.S interest rates and the direction of the Fed.

I think there's a concern that you have so many Fed officials that are due to come out this week and speak out this week and speak at various forums," Alvarez noted.

The market is pricing in the Fed rhetoric ahead of the events, he commented.

Also, Russian paper was lower Tuesday as pensioners set out to protest against the monetization of benefits.

The Russia bond due 2030 lost 0.438 to 102.562 bid.

Argentina falls hard

Argentina launched its debt swap Friday to restructure $104 billion in defaulted debt and investors pushed its bonds sharply lower Tuesday.

"You have an international political confrontation going on between the Italian government and the Argentine government as far as the latest offering," noted Alvarez.

"The Italian government, obviously, trying to apply as much pressure as it can to its retail holders. That seems to be coming of no avail."

"Everything is up in the air right now," he said.

Another market source said that last week, there was a sense of optimism that the debt structuring could take place, given that locals were signed on.

"Now, we may not know till the very end. And that's putting pressure on the paper."

Argentina bond due 2008 dropped 1½ points to 31 bid.

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