Emerging market debt snaps out of doldrums, tracks U.S. equities higher; Arab Banking to market bonds

By Reshmi Basu and Paul Deckelman

New York, March 6 - Emerging market debt bounced back Tuesday after seesawing over the past few sessions as U.S. stocks recorded their biggest gain since July.

U.S. equity markets halted a week-long rout following reassuring comments by Treasury secretary Henry Paulson who said that the rise in defaults in sub-prime mortgage companies will not hurt banks that make less risky loans.

Also adding support to the asset class, the Japanese yen posted its biggest loss against the dollar in five months, which suggested that the carry trade was still in play. The decreased risk aversion was also seen in the U.S. Treasury market as the yield on the 10-year note jumped to 4.53%, up from Monday's close of 4.50%.

That strength in core financial markets and a bounce in commodity prices gave way to a cautious rebound in emerging markets as the week-long flight-to-quality reaction of world financial markets to last week's global stock plunge appeared to have run its course

At session's end, the JP Morgan EMBI Global Index rose 0.2% while spreads narrowed by two basis points versus Treasuries.

Meanwhile the in the primary market, Bahrain's Arab Banking Corp. (BSC) plans to start investor presentations for a dollar-denominated offering of 10-year subordinated lower tier II notes (Baa2/BBB+/BBB+ issuer ratings) this week.

The floating rate notes will be non-callable for five years. If the notes are not called, the coupon steps up by 50 basis points.

Citigroup and JP Morgan are joint bookrunners for the Regulation S deal.

EM better bid

Back to the broader market, the Asian trading session Tuesday saw better bids across the board, trading in sympathy with the stronger tone seen in regional equity markets, according to a market source.

On the sovereign front, there was strong dealer buying for the Philippines global bond due 2032, which has outperformed the 2025 bonds as well as the long end of neighbor Indonesia's curve.

On the high-grade corporate side, the five-year Hutchison Whampoa and PCCW bonds were better bid as spreads narrowed by 5 basis points.

The firm tone extended to the New York session as U.S. stocks rolled ahead and emerging markets rebounded on short covering.

A trader in Latin American issues noted that "the market bounced a little today [Tuesday]. Spreads are probably tighter by 7 to 10 bps, depending on the credit."

He said "a better tone in the global markets in terms of equities and some of the currencies [versus the yen] helped to start the rally this morning, and it seemed to continue throughout the day."

S&P ups Colombia

Also brightening the EM debt market's overall outlook after nearly a week of retreat was ratings agency action, with Standard & Poor's raising Colombia's foreign credit rating to BB+, up a notch from BB previously, while Fitch put Peru on watch for a possible upgrade, "so a couple of things clicked in place," according to a trader.

In its upgrade announcement, S&P said that "Colombia has enjoyed robust economic growth while boosting tax receipts and administering a better tax administration, which mitigates significant spending pressure stemming from military build-up, increased pension outlays, and an expensive ongoing intergovernmental transfers system."

The trader saw Colombia's bonds having tightened by 10 bps on the S&P news, with Peru 6 bps tighter as well.

Other market observers saw the yield on Colombia's peso-denominated 11% benchmark bond due 2030 as having fallen by as much as 20 basis points at mid-afternoon, to 9.69%, while the price pushed up about 1½ points to 109.47.

"We had a little bit of a bounce back today [Tuesday]," the trader said, "but the question is whether we can do it for more than a day."

Peru also scored a slam dunk Tuesday on the Fitch news. In trading, the Peruvian bond due 2025 added 0.25 to 112 bid, 112.75 offered.

Among benchmark names, the bellwether Brazilian bond due 2040 added 0.20 to 133.65 bid, 133.70 offered. The Argentine discount bond due 2033 moved up 0.60 to 113.75 bid, 144 offered. The Turkish bond due 2030 gained 0.75 to 152.125 bid, 152.625 offered.

Buenos Aires finance minister resigns

In other developments, finance minister Gerardo Otero of the Province of Buenos Aires resigned Monday, a move triggered by the standstill between the federal government and the province regarding the financing of wage hikes for teachers, according to local reports.

"Otero disagreed with the relationship between the province and the federal government on financial issues," said Governor Felipe Solá.

The resignation follows last week's decision by the province to shelve its $425 million offering of fixed-rate senior notes due 2028 due to market conditions,

"One important issue to keep in mind at this time is that, in our view, the national government is likely to give in to the demands from the province to disburse further resources," wrote Alberto Bernal, fixed income analyst at Bear Stearns, in a research note.

"Hence, if BA cannot tap international markets, the national government will make up for the financing shortfall. Why? Because this year is an election year (the national government does not need to see additional strikes, etc), and because the new finance minister will be, according to the local press, a pure 'Kirchnerista,'" he wrote.

Despite the negative news on the political front as well as the issuance front, "the relationship of the spreads of the provincial bonds vis-ŕ-vis the sovereign bonds continues to price too much risk differential," Bernal added.

Among the reasons why a repricing at these spreads should take place is that the province's debt/GDP ratio was 15% in 2006, down from 16% in 2005, he added.

Also, the economy of the province and the national economy bear a correlation coefficient of more than 96%, which means that since the Argentine economy is expected to see strong growth this year, the fiscal deficit will be in line with a declining debt ratio.

"Most relevant - Buenos Aires accounts for 35% of the produce of the country, allowing for the province to enjoy, in our view, from a 'too big to fail' asset (the national government will likely bail out Buenos Aires if needed)," Bernal explained.

Meanwhile Standard & Poor's left the province's credit rating unchanged. The agency said Otero's exit may up "the risk of fiscal slippage in Buenos Aires", but added that the "event is already factored into the rating."

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