Emerging markets still without new issuance; trading mixed; new Argentina bond overpriced

By Christine Van Dusen

Atlanta, June 3 - The volatility of recent weeks seemed to calm somewhat Thursday, leading emerging markets investors to wonder whether the worst is over and which issuer will be the first to step up if stability continues.

Yields for 10-year Treasuries climbed about 3.9 basis points by late afternoon, and 30-year Treasuries rose about 4.7 bps as U.S. jobless claims declined a greater-than-expected 453,000 for the week ended May 29. Market-watchers now await the May report on unemployment and non-farm payrolls, due Friday.

But even as the picture looked to improve for riskier assets like emerging market bonds, the primary remained silent on Thursday.

"On new issues, there's nothing new," a Europe-based trader said.

No new issues

Issuers are waiting for someone to put a toe in the water and let them know the temperature, a New York-based market source said.

"Banks are looking into it, waiting for the market to get better," he said. "They're just waiting for someone to make the first move. Everyone is waiting for a large sovereign or a high-rated corporate to open the market."

He expects the market will see higher-rated names bring issues first, and then activity will move down the scale until it seems safe for emerging market issuers and first-timers.

"We have a few clients monitoring the markets on a daily basis," the New York source said. "Hopefully they'll decide to move forward. We had a couple of positive days, yesterday and today, and if this continues we probably will see some movement in new issues."

His sense is that issuance could pick up as soon as next week if the market continues on a path to stability. And the deal flow could be heavy, given all the issuers queued up and waiting out the volatility.

Market-watchers speculate that list could include Russia-based Mobile Telesystems' planned 10-year eurobond issue and Saudi Arabia-based Sabic Capital's expected offering of five-year senior unsecured notes, as well as Russian lender Sberbank's planned $1 billion five-year bonds.

"There is going to be some activity once the market opens up," the New York source said.

In the meantime, the primary remains "totally suspended," said Enrique Alvarez, debt strategist with think tank IDEAglobal.

Still a focus is Spain and its large rollover of debt coming in July.

"That will destabilize matter even more," Alvarez said. "As we drift toward that point, I don't think anyone wants to venture into territory where you issue new paper and run the chance of not being very successful."

Trading stays mixed

Overall, trading on Thursday was mixed and similar to the previous day's activity, with small losses for high-beta credits and some upticks and tightening for some of the core credits.

"It has only moved a very moderate amount in spreads and prices," Alvarez said.

The European trader was keeping an eye on Argentina's $738 million 8¾% seven-year fixed-rate notes, which priced Wednesday at 90.11 to yield 10.8%.

Bank of America Merrill Lynch "is buying the Argentina paper," he said. "I guess they are bullish on it."

In general, though, the deal was "marketed at an unrealistic price," Alvarez said. "It plummeted as soon as it was released. The market drilled it down to 80, 85 where it registered a 13% yield."

That was a "little better" on Thursday, he said. "What's noteworthy is that with the 2017s, it's a divorce story from what is typically the norm for Argentina. The government tried to make a statement about where risk should be priced for Argentina, which has to do with the political impression they want to make. But that was nowhere near reality and the bond suffered a large markdown and is still sort of gyrating to find equilibrium."

Elsewhere in Latin America, Brazil has seen a "small upswing over the last couple of days toward the higher edges of its trading range," he said. "It's been unsuccessful for many months in terms of moving higher toward the upper boundary. I would tend to think that unless we have a large wave of deal surge and risk accumulation trading, I don't believe Brazil will get over the hump."

Alvarez pointed to the sovereign's 2034 bond. "It's trading at about 130 mid-market," he said. "That's about a 162 basis points spread over Treasuries, which is very near its higher end of the range."

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