Emerging market debt edges lower in light trade; Hong Kong's Gain Silver sells $420 million notes

By Reshmi Basu and Paul A. Harris

New York, Aug. 18 - Emerging market debt investors took a break Friday, as prices drifted downwards amid light trading summer volumes.

In the primary market, Gain Silver Finance Ltd., a wholly-owned subsidiary of Hong Kong-based developer Kerry Properties Ltd., priced a $420 million issue of 6 3/8% 10-year senior unsecured notes (BBB-) at 99.592 to yield mid-swaps plus 105 basis points.

Goldman Sachs & Co. ran the books for the Regulation S issue.

Emerging market debt was a tad lower as investors took a breather from the week's positive run-up, which saw spreads tighten on the back of better than expected U.S. data, including the consumer price index and producer price index.

Those numbers reinforced expectations that the Federal Reserve is done with further interest rate hikes. On that sentiment, the asset class this past week saw spreads grind to 187 basis points versus Treasuries, an indication of a pretty rich market, noted market sources.

Stretched valuations

Before the May/June sell-off, many investors complained about stretched valuations. And those concerns have since returned.

Over the last three weeks, spreads have hovered around 190 to 200 basis points, according to a market source.

"We have risen so much and we are at such tight spreads levels, that the market needs to take a little bit of breathing room here and figure out what the next catalyst is to move it towards the upside again," remarked Enrique Alvarez, Latin America debt strategist for think tank IDEAglobal.

"Brazil is either beyond or pressing the spread levels that we saw in May before the start of the sell-off," he said, adding that Peru has surpassed those levels.

Following the May/June sell-off, Brazil has made notable advances on a dollar basis. On May 1, before the sell-off, the 2040 Brazilian bond was seen at 128.35 bid, 128.45 offered. On June 1, the bond was spotted at 123.05 bid, 123.50 offered. And on Wednesday, for the first time since March, the bond pierced the 130 handle.

Light volumes

Meanwhile there are a few laggard credits, but overall the market may have run out of triggers to push the external market higher, noted sources.

On Friday, volumes remained light in keeping with the summer session.

In trading, the Brazilian bellwether bond lost 0.15 to 130.40 bid, 130.45 offered. The Argentinean discount bond due 2033 lost 0.35 to 98.90 bid, 99.25 offered. The Russian bond due 2030 slipped 0.06 to 110.75 bid, 110.875 offered.

Elsewhere, Mexico's debt has underperformed the market. But Alvarez noted that the sovereign has traded relatively well in light of Treasuries' performance. Secondly, he pointed out there is some local noise concerning the disputed presidential election that was held on July 2.

"It may be that people have already played the positives and are waiting to see what happens before Sept. 1."

The Federal Electoral Court has until Aug. 31 to complete the partial recount of the ballots and until Sept. 6 to announce a president-elect or annul the election. Conservative Felipe Calderon narrowly beat leftist Lopez Obrador.

"Liability management is still quite active in Mexico and I think that underpins prices," Alvarez noted.

During the session, the Mexico bond due 2026 was unchanged to 157 bid, 158 offered.

Moving to Venezuela, the country has had to play catch up and is yet to revisit the spread levels seen in early May.

"Over the last few days, it's taken a little bit of heat due to fact that we have had a crude oil sell-off, although there was a little bit of a bounce back today [Friday]," noted Alvarez.

Investors may also be stepping back to reevaluate how much risk they will add heading into the Dec. 3 presidential election. But Alvarez added that Venezuela is still a strong oil credit.

On Friday, the Venezuelan bond due 2027 gave up 0.05 to 124.10 bid, 124.40 offered.

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