Emerging market debt ticks lower on Treasuries dip, but spreads tighten; three corporates to price

By Reshmi Basu and Paul A. Harris

New York, Jan. 25 - Spreads for emerging market debt narrowed Wednesday, even as U.S. Treasury yields shot up to their highest level in 2006. However the market lost traction in terms of dollar prices.

In the primary market, Thursday's session will see several deals price.

Kazakhstan's Bank CenterCredit International BV is expected to set terms on $200 million to $300 million in five-year senior unsecured notes (Ba1//BB-) during London's afternoon hours.

The order book stands at $525 million with European orders making up half of the book.

Meanwhile, the issue is being talked at 8 1/8% to 8 3/8%.

Citigroup and ING are underwriters for the Regulation S offering.

Next power generator Mirant Trinidad Investments of Trinidad & Tobago (Baa2/A-) has set price talk for a $100 million offering of 10-year bullet bonds at 250 to 275 basis points more than Treasuries via Credit Suisse. Pricing is expected to take place early Thursday.

And out of Brazil, National Steel SA (Vicunha Siderugia) is expected sell a $350 million to $400 million issuance of perpetual securities (/B+/BB-) on Thursday.

The book size is more than $600 million, according to a market source. Credit Suisse and Deutsche Bank are running the Regulation S deal.

In follow-on activity, Brazil's Cosan Industria e Comercio SA's upsized offering of $300 million in perpetual bonds (Ba2/BB) was seen trading at par bid, 100½ offered at early afternoon Wednesday.

The debt was priced at par to yield 8½% on Tuesday.

Credit Suisse and Morgan Stanley managed the Rule 144A/Regulation S transaction.

Treasury yield up, EM tightens

Spreads for emerging market debt tightened to another record low Wednesday, outperforming a slumping U.S. Treasuries market. However, the asset class saw a pullback in dollar prices.

Yields on Treasury debt jumped in response to the disappointing Treasury auction of $22 billion in new two-year notes. The yield on the 10-year notes rose to 4.48%, up 8 basis points from Tuesday.

Emerging markets' reaction to U.S. Treasuries is a break from the recent pattern where it has been immune to Treasury volatility. But the market is reacting to a new level set by the 10-year note, according to Enrique Alvarez, Latin America debt strategist for IDEAglobal.

"These 4.48% levels have motivated a bit of profit taking," he said, adding that a sell-off is to be expected given that Latin American bonds have trekked higher since the start of December and have not endured a bout of profit taking since then.

During the session, the Brazilian bond due 2040 slipped 0.95 to 129.60 bid, 129.90 offered. The Ecuadorian bond due 2030 lost 0.10 to 95.65 bid, 95.90 offered. The Colombian bond due 2030 shed 1.10 to 138.60 bid, 139 offered.

Argentinean bonds underperformed the overall EMBI, observed Alvarez, adding that loss was due to the longer duration of the bonds, which "have become a substitute for Brazil as far as the high beta instrument of choice."

At session's end, the Argentine bond due 2033 lost 0.95 to 89.30 bid, 89.65 offered. The bond due 2038 fell 0.35 to 35.15 bid, 35.40 offered.

Since the start of the year, the U.S. Treasury market has been range bound but that changed on Wednesday.

"The question becomes if Treasuries jump above 4.50%, what is the market going to do?" remarked Alvarez.

Venezuela's 2027 dips after recent jump

On Wednesday, Venezuela's bond due 2027 lost 0.40 to 124.10 bid, 124¼ offered. Even though Wednesday saw a dip, the bond has been skyrocketing since the beginning of the year, stemming from high crude oil prices.

One camp also speculates that the Venezuelan government would buy back debt, noted Alvarez, who added that does not mean that the 2027 bond is necessarily an obvious target.

"They would probably choose to skew towards the front end of the curve. The 2027 has most of the liquidity in Venezuela and I that's why you see a lot of the activity in it."

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