J.P. Morgan & Co. and Chase Manhattan Corp. have underwritten a $1.5 billion bond issue for Mexico, the second big issue to come out of Latin America this year.

Banking sources said both the narrow margin of the 10-year issue's yield over equivalent U.S. Treasury securities and the fact that the issue was increased to $1.5 billion, from $1 billion, point to a marked strengthening of demand for emerging-market paper.

Argentina has already successfully done $774 million and $403 million bond issues, and it is expected to come to market soon with a $1.5 billion issue.

"The market is off to a very good year so far," said Michael Schoen, vice president at Morgan and co-head of its emerging-market syndications desk in New York. "We expect spreads are going to tighten further."

Banking sources said the most interesting part of the Mexican issue is that more than half of it was bought by "high-grade" investors such as mutual funds, insurance companies, and pension funds. Most such investors precipitously fled emerging markets after financial crises hit Asia, Russia, and Brazil.

"We're not just talking about dedicated emerging-market funds but about a much broader range of investors who are coming back in because of the scarcity of good-yielding, U.S.-dollar-denominated issues," said a banking source.

The quick pace of issues early in the year comes after optimism has grown that Latin America and other emerging markets have put their financial woes behind them and are poised to rebound.

Latin American bond issuance stagnated last year and in 1998 at about $38 billion, down from $52 billion in 1997 and $42.6 billion in 1996.

Morgan Stanley Dean Witter led the field last year in managing Latin American issues, handling $7 billion worth. Citigroup's Salomon Smith Barney came next, with $5.5 billion, then J.P. Morgan, with nearly $5 billion. Chase was ranked sixth, with $2.5 billion.

Still, banking sources said that pricing an issue can be tricky - even if the bigger and economically stronger Latin American countries are regaining access to global capital markets at lower interest rates.

Brazil this month temporarily postponed a planned $1 billion to $2 billion, 20-year bond issue after a sharp fall in the U.S. stock market Jan. 4 triggered uncertainty over the direction of U.S. interest rates.

Sources also said the market for corporate bond issues from the region has so far failed to recover its momentum.

"Latin corporates still have a liquidity problem because not every account is a buy and hold, and getting out of them can be a problem," said a New York-based emerging-market banker.

He added that even after large institutional investors have checked out the issuer and found the debt to their liking, "getting a hold of more than a couple of million dollars worth of paper can also be a problem."

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