Emerging market debt shrugs off Treasuries pullback; Bank of Moscow, LG Electronics hit the road

By Reshmi Basu and Paul A. Harris

New York, May 6 - Emerging market debt showed resistance as U.S. Treasuries sank on higher than expected U.S. job numbers Friday.

Treasuries were thrashed on news of a 274,000 jump in non-farm payrolls in April, far exceeding predictions of 175,000. The strong job data muffled concerns that the economy in the United States was in a new soft patch.

In late trade, the yield on the 10-year note stood at 4.27%, up from 4.16% on Thursday.

Unlike Treasuries, emerging market debt had a "pretty good" reaction to the hefty job numbers, according to a sellside source.

"Our market continues to outperform. I don't think we saw the market generally widen out today [Friday] on back of the numbers," said the source.

"Obviously, autos are still moving a lot. But we didn't really see anything else underperform and certainly emerging markets - while some of the dollar prices are down just a touch - they are down nowhere near as much as the comparable Treasuries are.

"The Brazil '40 on the day is down about 20 cents. And the long bond is down a whole point," remarked the source in the afternoon.

A trader also agreed that the market digested the numbers relatively well.

"In the past, you saw a lot more volatility," he said. "The market always feels like it's short. People are always buying. It doesn't matter what the number is."

Trading was very active in the morning, and then became quiet in the afternoon, he noted.

"Spreads tightened but obviously with the Treasury market all the way down, price wise - our [EM] market is down as well," he commented.

At the end of the session, the Brazil C bond was up 1/8 of a point to 101 1/8 bid while the bond due 2040 lost 0.10 to 114.90 bid. The Ecuador bond due 2030 was down 2½ points to 88¼ bid. The Russia bond due 2030 dropped 3/8 of a point to 106 5/8 bid. The Venezuela bond due 2027 shed 0.10 to 99¾ bid.

No impact felt from autos junk status

Meanwhile, the trader added that there were no residual effects from Thursday's announcement that ratings for both General Motors Corp. and Ford Motors Co. were cut to junk by Standard & Poor's.

"I think initially it [debt] gets nervous and trades off. And when all of the sudden there is no false selling, it trades up," said the trader.

"And that's what happened yesterday [Thursday]."

On Thursday, emerging market debt retraced the initial losses after a knee-jerk reaction to a ratings cut by Standard & Poor's for the troubled automakers.

"There was such a big rally before the GM news that a lot of it did not translate into immediately decreasing every price on every bond in every sector," said Diane Keefe, portfolio manager of Pax World High Yield Fund.

Furthermore, the trader added that fundamentals are providing support, helping the debt market become more resilient.

"People are getting out of other asset classes, and you're seeing money come into emerging markets."

However, this week was an exception as mutual fund flows into the market continue to be at a standstill. Emerging market bond funds had a modest outflow of $7.9 million during the week ending May 4, according to EmergingPortfolio.com Fund Research.

This marked the third time that there were outflows in the past 29 weeks.

"I think that we have had short covering this week as people sort of give in and cover shorts," remarked the sellside source.

"I'm really not sure that there are that many shorts out there. I guess there are still some. But in general, the continued out performance of our market has to have scared a lot of the shorts to cover by now."

Bank of Moscow, LG on road

The strong job numbers mean that supply will come into the market over the next several sessions, remarked the sellside source.

"As long as investors are still sensitive about pricing...and size of deals - as long as those things are managed, I think people will go for it," observed the source.

In the pipeline, Bank of Moscow has started marketing in Asia for a proposed issue of dollar-denominated bonds with a maturity of five- to seven-years.

The U.S. leg will start in the early part of the week of April 9. BNP Paribas and JP Morgan are running the deal.

And South Korea's LG Electronics Inc. will start a roadshow for its dual tranche offering of $600 million bonds (Baa3/BBB-) during the week of May 9.

The company plans to sell $300 million worth of five-year bonds and $300 million of 10- year bonds

Citigroup, Credit Suisse First Boston, Lehman Brothers and Korea Development Bank are managing the sale of the Rule 144A/Regulation S (no registration rights) issue

"And then it will be a question of what opportunistic sovereigns just come in and do deals," said the sellside source.

Usual suspects include the Philippines, Brazil and Turkey, added the source.

"And there's the Uruguay deal that had been launched and then was pulled after Indonesia was such a fiasco."

On April 14, the Republic of Uruguay postponed an offering of $300 million of 12-year bonds (B3/B) due to market conditions.

Citigroup was running the books.

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