Emerging market debt a tad behind U.S. Treasuries; Russian banks tap market

By Reshmi Basu and Paul A. Harris

New York, May 5 - Emerging market debt lagged U.S. Treasuries Friday, as U.S. government bonds rallied on the belief that lackluster job numbers point to a pause in the Federal Reserve's monetary tightening campaign.

On the supply front, Russian and Kazakhstan banks continued to tap the market. On Thursday, the capital markets saw three banks price deals. On Friday, four more banks entered the primary market.

Russia's Sibacadembank priced $350.882 million of three-year fixed-rate loan participation notes at par to yield 9% on Friday.

The yield came at the tight end of the 9% to 9¼% price talk.

Of the issue, $235 million were sold for new cash, while $115.882 million were issued in exchange for the bank's 9¾% dollar-denominated eurobonds due 2008.

ABN Amro and Citigroup were joint bookrunners for the Rule 144A/Regulation S transaction.

Next JSCB Bank of Moscow sold $500 million in seven-year senior loan participation notes (Baa1//BBB-) at par to yield mid-swaps plus 175 basis points.

Barclays Capital and JP Morgan were joint bookrunners for the Rule 144A/Regulation S offering.

Russia's Vimpel Communications (VimpelCom) set pricing on issue of up to $600 million 10-year loan participation notes at par to yield 8¼% on Friday via UBS

UBS led the Rule 144A/Regulation S transaction.

The company plans to issue a portion of the notes in exchange for up to $250 million of its $450 million outstanding 10% loan participation notes due 2009.

Finally in primary news Friday, Narodny Bank of Kazakhstan sold $400 million of seven-year bonds (Baa2/BB/BB+) at 99.76 to yield a spread of mid-swaps plus 220 basis points, according to a market source.

HSBC and JP Morgan managed the Rule 144A/Regulation S deal.

Job growth slows, wages higher

Emerging market debt trailed a smidgeon behind U.S. Treasuries Friday, which rallied after weaker-than-expected job numbers raised investors' hopes for a pause in monetary policy.

"The market has been marginally better bid today [Friday] on the back of the jobs numbers, but not nearly as much as you might expect from the surge in global equity markets," noted an emerging market analyst.

The U.S. Labor Department reported that 138,000 new jobs were created last month, falling way below market expectations of 200,000 new jobs.

But while the pace of jobs created slowed down, there were signs of inflationary pressure within the report, which offset the euphoria over April's lackluster job growth, according to the analyst.

"The problem is that the jobs report was not exactly weak, especially when you factor in the rise in hourly earnings, the rise in the average workweek, and the fact that unemployment remained unchanged at relatively low levels.

"That means the market is still going to be waiting for further information on the U.S. economy and potential inflation," he added.

EMBI wider

Overall, the EMBI+ was wider by one to two basis points Friday, according to Enrique Alvarez, Latin America debt strategist for research firm IDEAglobal. He attributed the market's slight underperformance to thin volumes.

During the session, the Brazilian bond due 2040 added 0.45 to 128.45 bid, 128.55 offered. The Russian bond due 2030 gained 0.13 to 107.813 bid, 108.125 offered.

The Venezuelan bond due 2027 moved up 0.20 to 125.80 bid, 126.15 offered.

"The market is pretty comfortable in the zone that it's in at this point," he said, adding that the market may turn sour if the yield on the 10-year Treasury note pierces 5.15%. During Friday's session, the yield on the 10-year note slipped to 5.11% from Thursday's close of 5.15%.

But sources have complained that with spreads so tight, it is hard to see an upside to this market.

Over the short term, the fundamental story for Latin America is not expected to improve, even though high commodities prices are lending support to the economic story.

"What you do need is a defining event from Treasuries," noted Alvarez.

"You ... need to see that we are finally at the tip as far as rates are concerned on the U.S. side and that [rates] could possibly start to move lower, given some time and some slowdown in the U.S. economy," he said, adding that would favor the region.

"But other than that, everything else has been discounted by the market,"

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