Emerging market debt soft; Brazil down; China sets price talk for $1.7 billion equivalent bonds

By Reshmi Basu and Paul A. Harris

New York. Oct. 19 - Emerging market debt was softer Tuesday as an onset of drivers such as oil prices and Wall Street are impacting the buying mood in the market.

"I don't think there is anything specific," said a sellside source. "Certainly we had oil prices soften up in the last few days. Equities are softer.

"I think people have been a little more concerned about the equity market and whether that is sort of signaling a generally lower level of risk coming into the market right now.

"But beyond that, my sense is that it has been more trading-oriented accounts pushing the market up and down within the range that it has been trading in.

"But certainly, the market has felt softer in the last few days, " added the source.

CPI up 0.2%

Tuesday's release of U.S. consumer price index numbers for the most part erased ongoing speculation that the Federal Reserve would be diverted from its measured pace of rate hikes.

U.S consumer prices rose a modest 0.2% in September. Excluding food and energy, core consumer prices climbed 0.3%, slightly higher than market expectations.

And those numbers impacted the U.S. Treasury market early on. Yields on the 10-year Treasury rose after the Labor Department reported that CPI had accelerated. But the 10-year note bounced back as oil climbed higher during the session and stock prices sank.

Firming of oil prices from the session's lows and the investigation by New York attorney general Eliot Spitzer into the insurance industry put pressure on the equity markets. Oil ended at $53.29 a barrel on the New York Mercantile Exchange after having been as low as $52.59 during Tuesday's session. The Dow Jones industrial average was down 0.59% at 9,897.62.

The yield on the 10-year note fell to 4.04% from 4.05% at Monday's close.

In emerging markets, spreads overall were wider. The JP Morgan EMBI+ index moved out six basis points to 418 basis points over Treasuries at late afternoon.

During Tuesday's session, Brazil's C bond fell ¾ to 98 3.8 bid while its bond due 2040 fell 1.70 to 111.40 bid. The Mexico bond due 2009 was unchanged at 114½ bid. Russia's bond due 2030 gained 1/8 to 99 1/8 bid. And the Venezuela bond due 2027 lost 1.40 to 101.60 bid.

"It was soft this morning," said the sellside source. "And the de-acceleration really accelerated during lunch time."

Hearsay also hurt Brazilian paper. There were rumors that the government was pressuring the Brazilian Central Bank monetary policy committee (Copom) to keep the 16.25% Selic steady at its Tuesday and Wednesday meeting, according to a market source.

The Central Bank denied the allegations.

China sets price talk

The People's Republic of China set price guidance for its dual Regulation S euro-denominated and U.S. dollar-denominated tranches, according to a market source.

Guidance for the €1 billion-denominated bonds due 2014 is 43 basis points more than euro mid-swaps.

Guidance for the $500 million bonds due 2009 has been set at 63 basis points over Treasuries.

Given that the issuance is not Rule 144A, most of the players will be from Asia.

"It's not the U.S guys with the exception of the hedge funds who are really offshore," said the sellside source.

"The dollar book is heavily an Asian book. There are some European investors and a small number of U.S investors.

"But it's heavily Asian, which is sort of what you would expect, especially since the euro is really what is really being focused on for Europe."

BNP Paribas, Deutsche Bank and UBS AG are running the euro tranche and Goldman Sachs & Co., JP Morgan, Merrill Lynch & Co. and Morgan Stanley are managing the U.S. dollar tranche.

Impact of presidential election

Some have said that the upcoming U.S. presidential elections are creating market jitters. But this may be too simplistic of a headline story, said an emerging market analyst.

"But it is at least a part of what's going on here, the market doesn't like how tight the polls are this close to the election and that's just another excuse to sell when there are so many good fundamental reasons to be worried.

"High oil prices, insurers getting smacked by a Spitzer suit, the slowing U.S and global economy - when you have election worries to top it all off, you've got a pretty bearish scenario out there," he said.

"Undermining everything is that EM is still overvalued, especially if you think that a slowing global economy can put an end to the sovereign upgrade cycle.

"And the threat of new issuance remains a concern, although there aren't a lot of signs of major issuers rushing to sell into the bear market," he noted.

But the elections are, indeed, an element of uncertainty, according to the sellside source.

"I think if you said to people is [George] Bush vs. [John] Kerry winning good or bad for emerging markets, I'm not sure people would have a specific or accurate answer to that.

"I don't really feel like the market thinks that one outcome is better or worse than another."

Holding on to year's gains

And the sellside source added that uncertainty from the election is not sidelining investors. It has to do more with the year coming to a close.

"It's been a funny year for people. No one has made a killing in the market," said the sellside source.

"People have generally made money in the last few months. And people are trying to hold onto to those gains as you get into the last part of the year.

"So no one is going to bet the ranch in the fourth quarter.

"People would like to slide into year-end and hold on to what they've made and not lose it all in the last month or two.

"I think it's more of a cautious conservatism at this point because earlier in the year, people were substantially less up in terms of their performance," said the source.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.