EM bonds track Treasuries lower; Brazil 2040 seen at lowest since March; ADB prices $1 billion

By Paul Deckelman and Aaron Hochman-Zimmerman

New York, June 5 - Emerging markets paper tracked Treasuries lower in Tuesday's session, with 10-year U.S. government paper poised on the threshold of yielding 5.0%

Brazil's benchmark 11% notes due 2040, the bellwether of the emerging markets asset class, dipped to their lowest level since March.

In the primary market Asian Development Bank place $1 billion of 5¼% 10-year paper, as the focus was mainly on quasi-sovereign and corporate deals from Latin America, the Middle East and Russia.

Treasuries down, but spreads steady

In the secondary market, participants took their cue from the retreat in U.S. Treasury prices triggered by the unexpected rise in the Institute for Supply Management index, which showed greater-than-expected growth in the non-manufacturing sector of the U.S. economy - a surprise development which put any hopes for a Federal Reserve interest rate cut later this year on the back burner at best, or maybe even into the deep freeze altogether, according to some analysts, like those at Goldman Sachs & Co.

Emerging bond prices generally tracked Treasuries lower - but the all-important risk spreads between the two asset classes, as measured by the widely followed EMBI+ index compiled by JP Morgan & Co., remained pretty much where they already were, at around 151 basis points on average - still just about 2 to 3 bps above their all-time tight levels, indicating that investors are still pretty comfortable with the risks involved in the EM markets.

Brazil lower

Brazil's benchmark 11% notes due 2040 were being quoted down ¾ point on the session to around the 132.5 level - their lowest reading since early March, when those bonds, and emerging debt in general, were reeling in the wake of the Chinese stock market meltdown that started in late February.

That debacle caused bonds of many issuers to fall sharply, while Treasuries went the other way, benefiting from a flight-to-quality reaction by investors, which caused the EMBI index to balloon out to an average spread of about 193 bps.

Since then, that spread has backed on down to its new lows, and even the latest Chinese stock market problems, seen last week, have not had much impact on investors' appetites for risk.

EM debt has recently been strong pretty much across the board as local currency units have strengthened, and on signs that the underlying economies are growing and healthy.

In Brazil - with some analysts forecasting an upgrade before long to investment-grade status, based on the robust conditions in Latin America's largest economy - its currency unit, the real, recently punched below the psychologically potent 2-to-a-dollar level, aided by strong capital inflows.

In Tuesday's dealings, however, the real weakened for a second consecutive session on the news that the country's industrial output declined in April, which could cause the central bank to cut its key lending rate on Wednesday. It lost 1% Tuesday, on top of a 1.5% dip Monday that came in response to renewed Chinese stock weakness.

That downturn, to 1.945 reals per dollar from 1.927 on Monday and 1.9049 at the close on Friday, likewise weakened real-denominated bonds.

After rising 7 bps on Monday, the yield on Brazil's zero-coupon bonds due 2008, considered its benchmark in the local-currency market, was quoted up another 3 bps Tuesday to 11.43%.

Mexico continues rise

However, as was the case on Monday, Mexico's bonds were seen firmer, helped by expectations of lower inflation after the results of a survey of economists were released. Those pundits - who last month on average forecast a year-end inflation rate of 3.64% - have now shaved that estimate to 3.54%.

That helped to push the yield on the country's 7¼% peso-denominated bonds due 2016 down about 2 bps for a second consecutive day, to around the 7.55% level.

Turkey helped by inflation data

In other markets, Turkey's local-currency bonds were better, helped by a surge of buying by foreign investors impressed with that country's progress in the fight against inflation, as the annual inflation rate, announced Monday, dipped back below 10% in May, to about 9.2%, after having spiked upward in April.

The yield on the country's benchmark bonds due 2009 pushed down to just a shade above 18% - its lowest level in a year - down from 18.25% on Monday.

South Africa bonds regroup

South African bonds - which had recently been coursing lower - appeared to steady above their recent lows, investors having come in at those lows to take advantage of the buying opportunity.

The yield on the benchmark R153 13% notes due 2010 tightened to 8.57% from its previous close at 8.59%. Its shorter-term R196 bond tightened to 9.03% from 9.045% previously, and its longer-term R157 issue came in to a yield of 8.05% from 8.07% previously.

The yields had widened out last week, as investors priced in expectations that the country's central bank will announce a 50 basis-point interest rate increase on Thursday. But yields have now relaxed on speculation that it may be the last such rate boost for the near term.

Philippines mostly steady

In Asian dealings, the Philippines 2032 bonds were seen steady to slightly higher at just below 98 bid, while its 2031 issue firmed slightly to 114.

The five-year credit default swaps contracts on the nation's debt was seen having tightened another 1 bp to a new all-time tight level at 94-96 bps.

ADB prices $1 billion

Asian Development Bank priced $1 billion in 5¼% 10-year notes at Treasuries plus 38 basis points via Daiwa, Deutsche Bank and Morgan Stanley.

Approximately 41% of the paper was placed in Asia, 38% in the US, and 21% in Europe and the Middle East.

By investor types, around 60% of the bonds were bought by central banks, 19% by fund managers, 11% by banks and 10% by pension funds.

Middle East quasi-sovereigns

DIFC Investments released talk for its five-year sukuk offering. The deal is expected at Libor plus the low to mid 40s bps.

Deutsche Bank and Goldman Sachs are the bookrunners.

Meanwhile Kuwait Financial Centre Markaz is in the market with a $100 million offering of five-year floating-rate notes, according to a market source.

Barclays Capital, the National Bank of Abu Dhabi, and the National Bank of Kuwait have the books.

Talk on Latam corporate

Alto Parana SA talked its $270 million 10-year senior unsecured notes (Baa2/BBB+/BBB+) at Treasuries plus 135 to 140, according to a market source.

JP Morgan is the bookrunner.

The proceeds from the bonds will be used for refinancing and capital expenditures. The Chilean forestry enterprise Celulosa Arauco y Constitucion SA will guarantee the issue.

Russian deals

Russian issuers were notably active although no new deals priced from that part of the world.

Transneft launched a benchmark-sized five-year offering of loan participation notes which it will issue in dollars and euros.

Citigroup, Goldman Sachs and UBS will run the books for the deal that is expected to be on the road through June 14.

Elsewhere Spektr Group is in the market with $100 million 3-year credit-linked notes via MDM Bank. Guidance is set at 9¾% to 10½%.

Nutritek will begin a roadshow on June 11 for a 2.5-year fixed-rate deal, with early talk of 9% to 9¼%. The bonds will be issued through Winterhaven Finance BV.

And Rolf Group will begin marketing paper with a maturity expected in the three-year to five-year range (Ba3) on Thursday via ABN AMRO and Citigroup.

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