Emerging market debt finds comfort in FOMC minutes; primary reawakens

By Reshmi Basu and Paul A. Harris

New York, April 12 - Emerging market debt erased early losses to post gains Tuesday after the minutes from the March Federal Open Market Committee meeting were seen as a signal that the Federal Reserve would stay with its policy of gradual hikes, easing market fears of a potential half-point increase.

Meanwhile, after a dry spell, the primary market came alive as Indonesia resurrected its $1 billion 10-year sovereign issue.

On the economic front, while inflation concerns persist, FOMC members said the threat was contained.

"Although the required amount of cumulative tightening may have increased, members noted that an accelerated pace of policy tightening did not appear necessary at this time," the minutes said.

The U.S. Treasury market scored gains in relief. The yield on the 10-year note stood at 4.36% by the close of trading, down from late-Monday's level of 4.45%.

"We had quite an interesting day," said a Latin America debt strategist at Refco EM. "The market came out with negative numbers during the morning hours - the trade balance number," he said.

The U.S. trade balance surged to a new record high of $61 billion in February, fed by rising oil prices and consumer's desire for foreign goods, reported the Commerce Department.

"We were expecting the market to soften a little bit," said the strategist.

"And it traded without much direction throughout the day until the minutes were released at 2 [p.m. ET] in the afternoon.

"Although the minutes gave the indication that the inflationary environment was peaking, the market ignored it and then started heavily buying on the equity market and also the debt market - including emerging markets," he said.

The influence of the minutes was immediately felt. At 1 p.m. ET, the Brazil bond due 2040 was down 0.20 to 112.80 bid. By 3 p.m. ET, the Brazil 2040 bond was up a point to 114 bid.

The strategist noted that the market closed on a strong note with the Brazil 2040s trading around 1141/4.

Mexico and Venezuela also traded up, he said. The Mexico bond due 2009 gained 0.20 to 118.45 bid. The Venezuela bond due 2027 added 0.60 to 100.20 bid.

Uncertainty has made the market nervous as it treks with no direction, said the strategist. But this strong showing may only be a blip as he sees more volatility ahead.

"I'm not that optimistic, he said. "I think this is a short-term trend and we are going to see continuous weakness during the month."

Return of the primary market

Meanwhile, the primary picked up as stability returned to the market. So far, Venezuela is the only sovereign to price this month. The country priced $1.6 billion of 10-year notes in the local market.

Biggest of the new deals, and likely one of the first is Indonesia with its resurrected $1 billion offering of 10-year global bonds (B2/B+/BB-). The sovereign set price guidance at 7¼% to 7½% Tuesday. Indonesia postponed the offering three weeks ago due to market volatility.

Citigroup, Deutsche Bank and UBS AG are managing the Rule 144A/Regulation S deal.

Also, Russian Standard Bank set initial price guidance for a dollar-denominated three-year bond (Ba3/B) to yield 8 1/8% to 8 3/8% via Barclays Capital and Citigroup.

Chile's Celulosa Arauco y Constitucion SA set guidance for an offering of $300 million of 10-year bonds (Baa2/BBB+/BBB+) in the area of Treasuries plus 130 basis points.

JP Morgan is the sole bookrunner

Meanwhile PT Bank Internasional Indonesia will start a roadshow for a dollar­denominated 10-year bond offering (B2/B-/B expected) on Thursday in Singapore.

Barclays Capital, Development Bank of Singapore and UBS Bank are running the Regulation S deal.

Also hitting the road, Korea Exchange Bank will start a roadshow Wednesday in Tokyo for its $300 million offering of 10-year notes via Citigroup and HSBC.

And CJSC Kyivstar GSM plans to sell $150 million of seven-year bonds (B1/B+) on Thursday, according to a market source.

The proposed bonds will be non-callable for life.

Proceeds from the sale will be used for network expansion, to refinance existing debt and for general corporate purposes.

Citigroup and Dresdner Kleinwort Wasserstein are lead managers for the Rule 144A/Regulation S deal.

TFM abandons 10-year tranche

Also Tuesday, a new structure emerged on Mexican freight railroad company Grupo Transportación Ferroviaria Mexicana, SA de CV's $460 million bond offering.

The company now plans to sell a single tranche of seven-year non-call-four senior notes (expected B2/confirmed B+), which are talked at 9¼% to 9½%. TFM dropped a proposed offering of 10-year senior notes.

Pricing is expected on Wednesday.

Morgan Stanley has the books for the refinancing deal.

An informed source told Prospect News that the new structure reflects the company's preference given the present market conditions, and also reflects demand.

Mexico still a good buy, says research head

Despite the political ruckus in Mexico, its paper is still a good buy, according to Alberto Bernal, head of Latin America research for think tank IDEAglobal

Last week Congress voted to strip Mexico City mayor Andres Manuel Lopez Obrador of his immunity. Obrador will likely faces charges that he ignored a court order to stop construction of a hospital access road on private land.

"The political noise had an important effect on the market last week because the consensus around the Street is that the [President Vicente] Fox administration is utilizing a very dangerous strategy to try to get rid of an important contender in the 2006 election," said Bernal.

He added that while Fox would not be running in the presidential contest, his allies will, including interior secretary Santiago Creel. Because of Obrador's popularity, the aim was to block him from running for president in 2006.

Bernal noted that the "main problem here is that the markets do not like this strategy too much because they think it is too risky."

If the strategy backfires, it could imply that Obrador will be the next president by a landslide. That is seen as a negative by the market because Obrador has the reputation of being a populist, said Bernal.

Bernal added that local markets were dealt a blow from both the political noise and from the Fed.

"The sovereign curve suffered some sell-offs but the biggest effect was in the local environment, especially the M-Bond market, which has lost a significant amount of ground since the whole thing started," he remarked.

The yield on the benchmark 2023 bono is at 11.17%, observed Bernal. Before the noise began, the 20-year had come very close to 10%. The rates have gone up by almost 117 basis points in two weeks, he remarked.

But if investors are able to weather some volatility, Mexico is still a very good option to remain invested, said Bernal.

"We think that despite the political noise and despite the political chicanery, Mexico is in a much different place than it was at the last presidential election six years ago. Regardless of all the noise, the likely scenario is that the elections will happen and the outcome should be democratic.

"We do not see a financial crisis. The people who can weather the volatility will probably be paid off for the level of risk they are taking," remarked Bernal.

El Loco in Ecuador

Bernal recommends that investors remain "underweight" in Ecuador, given the recent political uproar.

Recently, former president Abdala Bucaram (El Loco) returned to Ecuador after eight years of exile, coming back after the country's Supreme Court acquitted him of misuse of funds during his presidency. Bucaram sought political asylum in Panama when Congress dismissed him for "mental incompetence" after only a few months in office.

President Lucio Gutierrez's relations with Congress have worsened since December when he temporarily assembled a majority which then fired the entire Supreme Court.

"The return of this guy implies increased levels of political noise. By definition, it is bad news. The most important issue here is what is the position of Gutierrez administration under the current political game," noted Bernal.

Bernal warned that the move to allow Bucaram to come back is going to backfire and affect the popularity and political stance of Gutierrez even further.

"Sometimes sleeping with the enemy works but I don't think this time it's going to work. It's a very unstable situation. Gutierrez has not been able to find ground in terms of boosting his popularity among Ecuadorian people," he remarked.

Furthermore, he added, Gutierrez is characterized by many as being plain ignorant.

"So we are definitely expecting a deterioration of the political situation under almost all scenarios.

"The only possible situation that could change our minds in terms of our positioning against Ecuadorian debt would be further and strong upswings in the price of oil," remarked Bernal.

"That could generate some very impressive windfall for the government and basically make them impervious to whatever happens on the international markets.

"Under that scenario, Gutierrez would possibly have enough cash to survive somewhat longer."

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