EM trades with Treasuries, Gerdau talks perpetual, market girds for Fed tightening

By Paul A. Harris

St. Louis, Sept. 12 - Emerging markets bonds tended to tighten Monday relative to Treasuries, which came under pressure.

At mid-day the EMBI Global Index was three basis points tighter at a 259 basis points spread to Treasuries. The U.S. government market, meanwhile, sold off sending the yield of the 10-year bond as high as 4.18% in Monday trading.

On a dollar-basis, however, sources were marking benchmark sovereigns off their recent highs.

"Things are a little softer but probably not substantially worse than Treasuries would have you expect," a sell-side source commented late in the morning, adding that EM was outperforming on a spread basis.

Brazil's benchmark dollar-denominated 11% bond due 2040 was at 119.80 bid, 119.85 offered at mid-day, off 0.55, according to a market source. Another source spotted it slightly lower on the bid side at 119.75 bid, 120.0 offered.

Meanwhile the Venezuela 9¼% dollar denominated bond due 2027 was at 110.55 bid, 110.75 offered, also off 0.55.

Elsewhere a trader who focuses on high yielding Asian credits spotted Indonesia's 7¼% dollar-denominated bond due 2015 at 99.25 bid, 99.75 offered.

The trader said that while the bond had pulled off a little, it had not reacted the same as most EM names on the session.

"It's definitely a little tighter on a spread basis," the source said, specifying that the Indonesia was five basis points tighter late in the session. However, the trader added, the bond was an eighth to a quarter off its highs.

Quiet primary market

Although there was a conspicuous pipeline, especially where corporates are concerned, no new issues were heard to price on Monday.

Indonesia (B2/B+/BB-) has mandated banks including Citigroup and Credit Suisse First Boston for what is expected to be an up to $1 billion sovereign issue which could involve a tap of the above-mentioned 7¼% global bond due 2015.

Nearer at hand, price talk of 9% to 9¼% was heard on Brazilian steel company Gerdau SA's expected $300 million senior fixed-rate perpetual notes offering (Ba1/BB-).

The roadshow is set to wrap up Tuesday in London, with pricing expected thereafter.

HSBC and Citigroup are the bookrunners.

A market source said last Friday that the order book for Gerdau's proposed perpetual notes had already topped $500 million.

Perpetuals popular

Gerdau joins two other Brazilian companies currently in the market with perpetual preferred deals.

Construction company Construtora Norberto Odebrecht SA is selling $150 million (BB-) via Credit Suisse First Boston, with a roadshow expected to wrap up Wednesday in Europe.

And Banco do Estado de Sao Paulo SA (Banespa) is poised to price a $300 million offering (Ba2) via Merrill Lynch.

"It's a fair amount of supply all at once," the sell-sider commented.

A close call on Turkey

The sell-sider also said that some people are expecting Turkey to turn up in the international debt market at some point.

"It's been quiet because they have these E.U. negotiations starting on Oct. 3, and people are getting more and more optimistic about that," the source said.

"They may wait, expecting that their spreads will get even better."

However another market source said that antagonistic members of the European Union, principally France and Greece, may try to derail Turkey's bid to enter the Union because of Turkey's refusal to recognize the sovereignty of Greek Cyprus.

Turkey's chances "seem split," one market source remarked Monday.

"The French remain antagonistic, and they might see the Oct. 3 talks as a last chance to jam up the talks.

The source added that United Kingdom, which is influenced by the United States, will probably want to allow the Turks more time to reconsider, while continuing talks.

"The question is, does the E.U. adopt a 'no [Cyprus] recognition-no talks' policy, or do things go the way Britain and the U.S. seem to want them to go?" the source said, adding that at present it seems too close to call.

The source had Turkey's sovereign bonds unchanged in Monday trading.

Fed will move, consensus votes

A preponderance of capital market sources who spoke to the Prospect News primary market desk on Monday said that falling crude oil prices and a recently rallying stock market all but eliminate the possibility that the Federal Reserve's Federal Open Market Committee will abandon its "measured pace" of short-term interest rate increases when it next meets on Sept. 20.

Enrique Alvarez, Latin American debt strategist for think tank IDEAglobal, said that players no longer seem focused on the near-at-hand Sept. 20 FOMC meeting, but on where the U.S. economy is headed in the intermediate future.

"People are aware that the Fed is going to go ahead in September," Alvarez said. "But then toward year end there is still some doubt out there as to how high the Fed will be willing to press rates because without a doubt, underlying the $63 crude oil there is $3.30 per gallon gasoline out there on the streets, which has to be affecting consumer confidence.

"I think people in emerging markets have already positioned themselves, favoring new allocations of cash into the category. But looking forward they have also positioned for an economic slowdown further out. And they're trusting that.

"That's why they're so long."

A win-win for Latin America

Alvarez went on to say that at present emerging markets investors seem to be taking positions based on the perception that whichever way the U.S. economy goes, Latin America is not a bad place to be.

"In a slowdown, where ultimately U.S. rates remain low, you have to search for yield, which is convenient for Latin America," he said.

"Or there is no slowdown or a minute slowdown, which continues to favor Latin America on the export front.

"It's not necessarily that simplistic. But that is the way the market seems to be interpreting things."

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