Greenspan foils emerging markets again; talk on oversubscribed Gazprom and Evraz

By Reshmi Basu and Paul A. Harris

New York, July 21 - Emerging market paper fell hard Wednesday as Federal Reserve Chairman Alan Greenspan suggested that the U.S. economy is growing fast enough to warrant interest rate hikes.

U.S. Treasuries sank for the second straight day on Greenspan's outlook at his second testimony to Congress Wednesday.

"Trading sucked," said a trader. "Treasuries are down, stocks are down, so EM was down.

"Brazil took the blunt of it. There probably is a large seller out there," said the trader.

Emerging market fell on the plunge in Treasuries. The JP Morgan EMBI Index fell 0.88%. Its spread to Treasuries widened by 11 basis points to 440 basis points.

Brazilian paper was down. The bond due 2040 was down 1½ points to 96.14 bid while the C-bond was bid at 93.312, down 0.375.

Treasuries had been surging on June's soft economic data as the economy looked to be cooling off. On Friday, emerging market debt rode high after subdued U.S. consumer price index numbers.

However, that was halted Tuesday and decisively so on Wednesday as Greenspan reiterated in his testimony to the House Finance Committee that the growth is sustainable and hikes are inevitable.

"Investors overbought bonds in previous days," said a debt strategist at Refco EM.

"His comments corrected that point of view."

The strategist added that investors are taking the opportunity to take profits from their May gains.

Talk on Russian deals

In primary action, the world's largest natural gas producer, Gazprom, set price guidance for its expected $1 billion of 15-year notes (-/BBB-/BBB-) at a yield of 7½%.

The book size has doubled in just one day to $4 billion from $2 billion.

A market source told Prospect News that they expect the issue to be upsized.

ABN Amro Holding NV, Merrill Lynch & Co. and Morgan Stanley are running the deal.

Russian steelmaker Evraz Securities set guidance for its expected $200 million five-year bullet (expected B3/-/B) at a yield of 10½% to 11%. The deal is coming to market via Credit Suisse First Boston and ING.

Out of Asia, the order book is at $700 million for Chexim's planned sale of $1 billion of 10-year global bonds (foreign currency rating A2/BBB+). The deal is coming to market via Citigroup, Deutsche Bank, Goldman Sachs & Co. and HSBC.

Price talk is in the area of Treasuries plus 96 basis points. Pricing is expected Thursday.

And the book size for Korean petroleum refining company LG Caltex Oil's $300 million bonds due 2014 (Baa2/BBB) is $250 million.

Deutsche Bank, Banc of America and Citigroup are running the Rule 144A/Regulation S offering.

Pricing is expected after the completion of Thursday's roadshow.

However, there was a rumor circulating Wednesday that the proposed issuance may be shelved because of labor disputes.

The Korea Times reported that one in every four gas stations in Korea is now closed due to a labor strike at LG-Caltex.

One source told Prospect News that they would not be surprised if the deal is pulled.

Stay short, suggests investor

Meanwhile, one investor said he is playing cautious because of his economic outlook.

The Fed is expecting 1½% to 2% inflation next year and 3½% to 4½% real growth for 2005. If investors think that the 10-year Treasury yield should be at the same level as nominal GDP growth over the longer term, then the 10-year ought to be trading 100 basis points higher in yield, according to Steve M. Hope, managing partner of Outrider Management.

As part of his strategy, Hope is taking short duration positions in Brazil, Turkey, Ecuador and the Philippines.

"I am still very short duration. My portfolio is heavily weighted in cash. And then I have a few very situation-specific distressed names that I have significant positions in."

"From a broad market standpoint, it seems like there is nowhere to go but down.

"The upside over the next six months is that you make your coupons. The downside is that you are down 15%.

"The risk reward is extremely biased towards the downside."

Furthermore, Hope is unenthusiastic about Russia.

"The Russian sovereign is a great credit story. But it trades at levels that aren't particularly interesting to me.

"It has great economic fundamentals layered over a pretty uncertain political situation."

And in terms of Russian corporates, there may be situation-specific risk at the individual corporate level that can apply to the biggest companies - with the exception of maybe Gazprom.

"But with Gazprom, you are talking about a company whose yields on its bonds are more or less on top of its sovereign."

Hope is not taking part in Gazprom's $ 1billion 15-year bong offering.

"Gazprom is a great credit but it is really priced too richly for me to give it serious consideration."

Greenspan's comments

Hope was also skeptical about Greenspan's latest comments.

"You have to keep in your mind that in a very politically charged climate, for Greenspan to come out in front of the Senate and House and say, 'I have serious questions about the health of this economic recovery,' would not have been in keeping with his past behavior," Hope told Prospect News.

"He was obliged to put a good spin on the economic numbers.

From that standpoint, one could argue that the market is taking too seriously his read on economic numbers.

"You can argue that the market is overreacting given the fact that of course, he was going to say that the economy was strong and that retail sales numbers over the last few months and employment numbers are just hiccups," Hope commented.

"If you take him at his word, it's pretty clear that interest rates have to rise over the next year."

July's good showing for emerging market paper may be coming to an end, Hope added.

"I feel like bonds should trade down over the next several months and rates are going to rise in the short part of the curve, if not the longer part of the curve."

Furthermore, it may take Greenspan to make investors refocus on the fundamentals.

"The reality is that we are moving from an incredibly accommodative monetary policy towards a neutral monetary policy.

"And growth that is below expectations but still reasonable shouldn't stop the Fed from doing that. That's the single thing that the bond market has been the least accepting of - is the fact that the Fed is not tightening to try to stifle hyperactive growth," argues Outrider's Hope. "It's tightening to move back to a neutral monetary policy"

And fund flows and portfolio managers' attitudes towards interest rates are driving the market. While there have been some country headlines from Russia, Ecuador, and Turkey, the U.S macro picture is running the show.

"When spreads get really tight, of course, you are focused on Treasuries because you have gone from 80% of performance being generated by either domestic or emerging market considerations to only 50%. And the rest being determined by what is going on in the U.S. Treasury market.

"When the spreads are 800 over, it's easy for Turkey to trade in its own world based what's going on in Turkey.

But when spreads are 400 over, it's just a lot tighter. There's a lot less room for credit-based compression," adds Hope.

Mexican corporates lower

In secondary trading, Mexican corporate bonds took a fall.

Cable company Innova's bond due 2007 fell a ¼ point to 102½ bid. 104½ offered from Tuesday's 102¾ bid, 104¾ offered.

Railway company Grupo TFM's bond due 2012 dipped ¾ of a point to 106 bid, 110 offered from Tuesday's 106¾ bid, 110¼ offered.

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