Emerging market debt down on equities, technicals as more supply hits market

By Reshmi Basu and Paul A. Harris

New York, Sept. 7 - Emerging market debt faltered for the second straight session Thursday as U.S. equity markets declined, triggered by fears of monetary tightening. Additionally, the asset class has been somewhat dragged down by technicals.

In the prior session, weakness in U.S. core financial markets and falling commodity prices coupled with sovereign bond exchanges and new deal announcements weighed on the asset class.

Thursday saw that negative sentiment carry over as U.S. stocks posted losses again and as new supply hit the market. U.S. financial markets were once more rattled by renewed concerns that the Federal Reserve will resume raising interest rates.

Moreover those fears were reinforced by comments made by Federal Bank of San Francisco president Janet Yelled, who said that inflation was still "uncomfortably high."

Meanwhile emerging markets continued to suffer from a hangover effect stemming from this week's new paper as well as sovereign bond exchanges, according to a market source.

And Thursday saw even more issuers hit the market. In a drive-by, the Republic of Uruguay sold a $300 million equivalent offering of peso-denominated 12-year inflation-linked bonds (B3/B/B+) at par to yield a coupon of 5%. The 5% will be adjusted to reflect Uruguayan inflation from the issuance date through the relevant interest payment date.

The deal is denominated in pesos while the principal will be paid in dollars

Deutsche Bank and Citigroup were the bookrunners for the Rule 144A/Regulation S transaction.

Elsewhere, Argentina auctioned $500 million in seven-year bonar VII bonds at a yield of 8.40%.

Also three Argentinean utility companies issued a combined total of $75.5 million in 10 ¾% senior guaranteed notes via a modified reverse auction Thursday via JP Morgan.

Empresa Distribuidora de Electricidad de Salta (Edesa) sold $48.5 million of the new notes at a clearing price of 101.50 to yield 10.23%. Empresa Distribuidora San Luis SA (Edesal) sold $18 million of the notes at 102 to yield 10.06% while Empresa Distribuidora de Electricidad de La Rioja SA (Emdelar) issued $9 million of the notes at 102 to yield 10.06%.

And out of South Korea, Woori Bank sold $500 million of five-year bonds (A3/A-/A-) at par to yield Libor plus 36 basis points.

The deal priced at the tight end of price guidance, which was set at three-month Libor plus 36 to 37 basis points earlier the day.

ABN Amro, JP Morgan, Merrill Lynch and Woori Investment & Securities managed the Rule 144A/Regulation S sale.

New trend in EM

Thursday also saw the market digesting news of buybacks from three sovereigns, according to sources.

On Wednesday, Colombia, the Philippines and Turkey came on top of each other with their plans to repurchase debt in an effort to improve their debt maturity profiles.

On that news there has been a steepening in the countries' yield curves due to expected supply in the long end.

Furthermore, market sources have observed that the new trend is for sovereigns to engage in debt buybacks and exchanges rather than issue new sovereign paper.

"I definitely think it's true that sovereigns are more interested in liability management [buybacks] than in dumping new supply on the market," according to an emerging market analyst.

"But buybacks can have a negative impact on the market through the additional duration they generally ask investors to take on - Colombia, Turkey and Philippines are all executing exchanges that will probably entail significant additional duration for the market," he said.

Furthermore, he expressed surprise that Turkey made an offer, given the weakness of the market in its bonds.

"There's no rush to get these exchanges done, so why not space them out a little?

"I do think all the additional duration has helped drive the sell off over the last few days, but by far the main driver has been rising global interest rates and generally higher global risk aversion.

Moreover he noted that the CBOE Volatility index (VIX) gave back most of its gains in August, and there are fears that this is only the beginning.

Most bonds weaker

As market jitters ratcheted higher alongside less supportive technicals, emerging market debt was weaker Thursday.

During the session, the benchmark Brazilian bond due 2040 gave up 0.20 to 129.90 bid, 130 offered. The Philippines bond due 2015 lost 0.38 to 113.75 bid, 114.20 offered. And Turkey's bond due 2030 shed 0.63 to 148.625 bid, 149.125 offered.

However, Colombia saw higher dollar prices. The Colombian bond due 2027 gained two points while its bond due 2033 added one point to 137 bid, 138 offered.

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