Emerging market debt slightly weaker; Leighton Finance to sell $110 million notes

By Reshmi Basu and Paul A. Harris

New York, May 8 - Emerging market debt lost some traction Monday on the back of softer U.S. Treasuries.

On the primary news front, Indonesian special-purpose vehicle Leighton Finance International Ltd. expects to price a $110 million issue of five-year fixed-rate senior unsecured eurobond notes before the end of the week.

Preliminary price guidance is the mid-swaps plus 250 basis points area.

HSBC and Commonwealth Bank of Australia are the joint lead managers for the Regulation S offering.

The issue would be a good fit for a diversified emerging market investor, according to an analyst note, adding that the issue has several positive factors working in its favor.

For instance, Leighton Holdings Ltd., the largest project management and contracting group in Australia, is the parent company.

Additionally, the deal is small, which means that it will most likely have support in the secondary market.

Furthermore the issue has more of a yield pick up than its peers such as Indonesian mining company PT Adaro's 8.5% bond due December 2010 (Ba3/B+), which was spotted at a bid level of 7.7%.

EM investors sidelined

Last week, emerging market debt volumes thinned out ahead of the release of Friday's non-farm payroll numbers, which came in below market expectations, setting off a U.S. Treasuries rally. On Friday, emerging markets played catch up with Treasuries - but still lagged behind - as the spread on the JP Morgan EMBI+ index widened by two basis points.

Monday's session saw low volumes as the market was once again put on hold ahead of this week's Federal Open Market Committee meeting, noted a trader.

On Wednesday, the Federal Reserve is expected to raise Fed fund rates by 25 basis points to 5% in what is expected to be a unanimous decision by FOMC members. However, the market will key in on whether or not there are any changes made to the accompanying statement, noted a market source.

The source added that investors would be combing through the statement for clues to support the case that the Fed is leaning towards a pause in its current monetary tightening campaign.

During Monday's session, emerging market debt dipped slightly on the back of a Treasuries slump. Investors of U.S. government bonds are anxious Monday ahead of Tuesday's auction of $21 billion in three-year notes and Wednesday's FOMC meeting.

Market jitters pushed up the yield on the 10-year Treasury note to 5.11% from Friday's close of 5.10%.

"EM was sort of flat today [Monday]," said a second trader, adding that the market was "slightly weaker on the Treasuries pullback."

By session's end, the Brazilian bond due 2040 had lost 0.25 to 128.20 bid, 128.30 offered.

The Argentinean discount bond due 2033 added 0.05 to 99.40 bid, 99.75 offered. The Russian bond due 2030 was unchanged at 107.80 bid, 108.12 offered.

Peru up on polls

On Monday, Peruvian bonds outperformed the market on news that former president Alan Garcia is enjoying a comfortable lead of 14 percentage points over nationalist Ollanta Humala for the June 4 run-off vote, according to Sunday's Apoyo poll.

Moreover, the polls showed that only 17% of those polled were in favor of Venezuelan president Hugo Chavez while 23% saw Bolivian president Evo Morales as favorable.

As part of his campaign strategy, Garcia has emphasized the connection between Humala's platform with both Chavez and Morales, according to an analyst.

And the strategy appears to be working, noted the analyst.

During the session, the Peruvian bond due 2016 jumped 0.75 to 110.25 bid, 111.25 offered while the bond due 2033 gained 1 point to 114.60 bid, 115 offered.

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