Emerging market debt tightens to another historical low; Pakistan to hit the road with two-part global

By Reshmi Basu and Paul Deckelman

New York, May 18 - Emerging market debt drifted lower on a price basis Friday as the sector was dragged down by the sell-off in U.S. Treasuries. However spreads narrowed to another record tight as appetite for riskier assets remained generally intact.

Among benchmark names, the bellwether Brazilian bond due 2040 eased 0.10 to 135.40 bid, 135.50 offered. The Russian bond due 2030 gained 0.13 to 112.875 bid, 113.438 offered.

And the Turkish bond due 2036 lost 0.25 to 97 bid, 97½ offered.

Pakistan to hit the road

In the primary market, the Islamic Republic of Pakistan (B1/B+) plans to commence a roadshow for a two-part offering of global bonds.

The deal will be comprised of a new dollar-denominated benchmark-sized issue as well as a reopening of the south Asian nation's dollar-denominated 2036 bonds.

The roadshow will begin in Dubai on Sunday, continue in London and Singapore on Monday, in Boston and Hong Kong on Tuesday, in New York and Los Angeles on Wednesday, and wrap up with a return visit to New York on Thursday.

Pricing is expected to take place on Friday.

Citigroup, Deutsche Bank and HSBC are lead managers for the transaction.

The bond deal is part of the sovereign's strategy to tap the market once a year.

On March 23, 2006, Pakistan completed an $800 million two-part sovereign bond deal.

The nation priced a $500 million issue of 10-year notes at par to yield 7 1/8% and a $300 million issue of 30-year notes at par to yield 7 7/8%.

Also adding to the pipeline, Argentina's Banco Macro SA plans to issue up to $100 million equivalent of Argentine peso-linked notes due 2012 as part of its medium-term note financing program.

The bank said the deal would occur before the end of the second quarter.

EM grinds tighter

Back to secondary trading, emerging market debt continued to tighten to historically low spreads Friday.

In trading, the spread on the JP Morgan EMBI+ index narrowed by 5 basis points to 150 basis points versus Treasuries, posting another record low.

But even as the asset class trades at new spread lows, the sector potentially could pierce even lower levels, supported by the benign market backdrop and low volatility, according to market sources.

"The demand is clearly there, and there's no end in sight to the things that have been propelling this market - generous global liquidity conditions, high commodities prices, and moderate political risk," said an emerging market analyst.

"Issuance levels have been high, so I think that should keep spreads from falling too much further, but until the market gets oversaturated with new issuance I think spreads may grind tighter," he added.

Mexico's local-currency bonds higher

In the secondary market, Mexican local-currency bonds - particularly those of five years duration or more - were seen better in anticipation of the release during the coming week of new data, which is expected to show inflation being held in check.

Those investor expectations gave the bonds a boost during Thursday's trading, and Friday's. The benchmark 10% peso bond due 2036 gained about1/3 point in Thursday's dealings, and additionally gained about half of that in Friday's dealings, quoted going out at 126.32. The bonds' yield tightened 1 bps, and now stands just below 7¾%.

Banco de Mexico, the country's central bank, is slated to release consumer price data for the first half of May on Thursday. Economists generally expect the report to show that consumer prices will have fallen about 0.10% during the first two weeks of the month, continuing the recent trend of moderating prices.

The central bank stunned the country's bond and stock markets with a surprise quarter-point raise in its key lending rate on April 27, saying the move was a precaution aimed at keeping inflation under control.

Brazilian real-bonds ease

In Brazil, real-denominated bonds were easier as the currency unit fell on foreign exchange market speculation that the country's central bank will step in to slow the recent rally in the real.

That caused the yield on the Brazilian zero-coupon bonds due 2008 to widen slightly to 11.41%.

The real punched through the psychologically important 2-to-a-dollar level earlier in the week for the first time in six years, improving to about the 1.96 level before the slight retreat on Friday.

Authorities in Brasilia want to reel in the rampaging real, because it makes the price of Brazil's export goods more expensive.

Pakistan down on technicals

In Asian dealings, Pakistan's bonds were being quoted lower on supply concerns, with that nation planning to sell $1 billion of new debt in a two-tranche dollar-denominated bond offering.

Its 2036 bonds were being quoted down a point, around the 107.25 bid, 108.25 offered level.

Meanwhile, the five-year CDS contract linked to the government's bonds widened out by around 2 bps to 190-195 bps.

Elsewhere in the region, the benchmark Philippines bonds due 2031 were quoted bid at 114.5 bid, and the 2032 bonds at 98.5, both pretty steady on the session.

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