Emerging market debt continues to grind tighter; Turkey up on E.U. vote

By Reshmi Basu and Paul A. Harris

New York, Oct. 3 - Emerging market debt opened the note on a positive tone, despite benchmark U.S. Treasury yields hitting a seven-week high.

"This is story of liquidity," said a market source. "Flows are good. Fundamentals are good. EM is good."

Meanwhile in the primary market, Brazil's Banco Votorantim priced a $200 million offering of 10-year bonds (expected ratings Ba3/BB-) at 99.48 to yield 7%.

Deutsche Bank Securities was the bookrunner for Rule 144A/Regulation S offering.

Telefonica del Peru SAA priced an upsized offering of S/. 754,312,500 - equivalent to $225 million - local currency-denominated notes (//BB) or at par to yield 8%.

Citigroup ran the Rule 144A/Regulation S transaction.

And adding to the pipeline, the Lebanese Republic plans to issue a dollar-denominated benchmark-sized offering of global bonds due January 2016 (B3/B-/B-).

Banque Audi, Banque Med and Citigroup are joint leads for the Rule 144A/Regulation S transaction.

Pricing is expected on either Wednesday or Thursday of this week.

EM opens strong

Emerging market debt showed more resilience Monday, even on higher Treasury yields. The search for yield continues to empower emerging markets, said sources.

The yield on the 10-year note stood at 4.39%, up from 4.33% at Friday's close. Even as Treasury yields mark a higher territory, emerging market debt movef higher on the technical story.

"The market has opened up very well bid," remarked a trader, who described the overall session as "fairly quiet."

"With Treasuries lower, prices have come up. And as we've seen even at lower prices, there still seems to be a pretty deep bid for paper," he said.

During the session, the Brazil bond due 2040 dipped 0.05 to 122.60 bid. The Venezuela bond due 2027 gained 0.15 to 117.30 bid.

"Brazil is doing fine. It's tightening again today [Monday] with the Treasury move today [Monday]. We're back to seeing similar levels from Friday," said the trader.

Turkish bonds up

In other news, Turkish bonds surged Monday as Ankara agreed to the European Union's terms for talks.

The Turkish bond due 2012 gained 0.88 to 128 7/8 bid while the bond due 2030 added 1.63 to 118¼ bid.

"The news was expected," said a source. "But the market is slightly relieved."

Technicals give support

The trader added that the technical story is behind the market's ability to grind tighter.

"Fundamentals are improving and people want a limited supply of paper," he observed.

"It's a story that's been going on for six to seven months now."

Currently, investors are overweight and cash balances are at levels below historical levels, said a market source. Additionally, exposure has been on the rise with dedicated portfolios holding overweight positions.

The source added that positions are heavy in some local markets, but with external debt falling short of demand, the search for yield should support the market.

Meanwhile the source added that even though valuations are tight, strong inflows into the market and low volatility are helping emerging markets outperform Treasuries, even as Treasury yields make a stab at another technical barrier.

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