Emerging market debt mixed; Russian Standard Vodka sells $85 million notes

By Reshmi Basu and Paul A. Harris

New York, May 31 - Emerging market debt saw more jitters Wednesday, as investors contended with falling commodity prices, a spike in U.S. Treasury yields and concerns over U.S. monetary policy.

In the primary market, Russian Standard Vodka sold $85 million of two-year credit-linked notes at par to yield 10% via Dresdner Kleinwort Wasserstein.

At the opening, the market saw a surprisingly firmer tone, according to market sources. Brazil saw spreads tighten by 10 basis points on local buying and short covering, noted a source.

Many had expected that the London open would see a hangover effect from Tuesday's weakness. But instead the market rallied, which resulted in trading accounts and locals working to cover short trades in Brazil.

Nonetheless, the rally in emerging markets was short lived. The market gave up some gains as the yield on the 10-year Treasury note approached 5.11% on concerns about what the Federal Reserve will do next.

Wednesday's release of minutes from the last Federal Open Market Committee meeting failed to uncover any clues about Fed action and only added to the uncertainty, noted a source.

During the session, emerging market debt was mixed. The bellwether Brazilian bond due 2040 lost 0.20 to 121.80 bid, 121.95 offered.

The Argentinean bond due 2033 gained 0.20 to 92.95 bid, 93.20 offered while the Russian bond due 2030 gave up 0.31 to 106.625 bid, 106.875 offered.

By session's end, the JP Morgan EMBI Global Diversified index had narrowed five basis points to 202 basis points versus Treasuries.

However, it is difficult to extricate a meaningful trend from Wednesday's session, except for concluding that more volatility lies ahead, according to Enrique Alvarez, Latin America debt strategist for research firm IDEAglobal.

In the second half of the past month, investors have become nervous about the direction of the Fed's monetary policy, which has resulted in the reduction of the appetite for risky assets.

Local currencies and equity market have seen the blunt of the sell-off, but emerging markets have not been immune to the market sentiment. For the month of May, spreads on the EMBI Global Diversified index kicked out by 32 basis points.

But even as spreads have widened, investors are still not ready to buy on dips.

"I don't think you have people bottom fishing here," observed Alvarez.

"It's very difficult to capture a good dip here. A good dip today could actually be a top three days from now, depending on where sentiment goes."

He added that longer-term investors were waiting to see how stories such as commodity prices and risk aversion play out. And of course, the market would be combing through upcoming U.S. economic data for any insight into the mindset of the Fed.

Peru under pressure

Meanwhile Peruvian bonds continued to see pressure in response to the weekend's release of opinion polls, which showed that former president Alan Garcia's has a narrow lead over leftist Ollanta Humala in the presidential race.

With no clear winner, Peruvian assets are expected to remain volatile ahead of the June 4 run-off.

At session's close, the Peruvian bond due 2033 was down 0.25 to 111 bid, 111.50 offered.

In other news, Brazil's Copom cut the Selic rate by 50 basis points to 15.25%, coming in line with market expectations.

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