Emerging market sees light flows on uneventful U.S. job numbers; three Asian corporations price deals

By Reshmi Basu and Paul A. Harris

New York, July 8 - Emerging market debt saw a quiet session Friday, as roaring U.S. equities, which resulted in a slip in U.S. Treasuries, silenced the market.

In the primary market, three corporates from Asia priced deals.

Korea's Shinhan Bank sold an offering of $350 million of 10-year bonds (Baa2/BBB-) at 99.80 to yield Treasuries plus 132 basis points.

ABN Amro and Banc of America Securities were the lead managers for the Regulation S transaction.

China Overseas Land & Investment Ltd. returned to the market after postponing a bond deal in May due to market volatility. It priced $300 million in seven-year bonds (Baa3/BBB-) at 99.404 to yield a spread of Treasuries plus 181 basis points.

HSBC and JP Morgan were the lead managers for the Regulation S transaction.

Also, Indonesia's Bank Niaga priced $100 million of 10-year lower tier II subordinated notes (B2//B+) at 7.95% via Citigroup and CIMB Bhd.

And Russian natural gas giant OAO Gazprom announced plans to start a roadshow Tuesday for a $1.9 billion two-part eurobond offering.

The offer is expected to include a $640 million offering of amortizing notes due July 2013, with a 3.8-year average life.

Deutsche Bank will run the books for the Rule 144A/Regulation S notes.

The proposed new issue is not in Gazprom's borrowing program for 2005, said a market source.

The source added that after the announcement, spreads for Gazprom's bond due 2013 and the Russia bond due 2030 widened by eight basis points to 30 basis points.

In other news, Argentina will reopen its Boden due 2014 for another one billion in Argentine pesos. The auction is expected to take place this Monday.

Equities rally puts lid on EM

The Dow Jones Industrial Average saw a strong rally on the back of the Labor Department's report that 146,000 new jobs were created in the United States.

The index rose 146.85 points to close at 10,449.14. That strong equities sentiment translated into a pullback in the Treasury market, said sources.

The yield on the 10-year note rose to 4.11% at the close from Thursday's 4.07%.

Overall, the job numbers had little impact on emerging markets, according to a Latin America debt strategist at Refco EM, calling the data "neutral," given that it was close enough to market consensus.

"The market was expecting a number in the neighborhood of 180,000 after the rather mediocre number that we saw in the prior month," said Alberto Bernal, head of Latin America research for think tank IDEAglobal.

The 146,000 number falls short of market expectations, but is in line with a growing U.S. economy but not so much that it will cause overheating, said Bernal.

He pointed out that an economic negative, such as $60 oil prices, has not impeded the U.S economy's capacity to create new jobs. The number is not great but acceptable, he remarked.

Even with negatives such as complications in the world economy, the level of the current account deficit in the United States or the expectations that the U.S. consumer cannot sustain the economy any longer, those factors have not deterred growth, noted Bernal.

"Despite all those issues, the U.S. economy is still pulling off acceptable rates of growth in terms of employment, which is rather an impressive occurrence.

"The Dow Jones is performing well. The [EM] bonds are selling just a little bit because of expectations of higher interest rates going forward," added Bernal.

During the session, the Brazil C bond was unchanged at 101 1/8 bid while the bond due 2040 slipped 0.30 to 118.20 bid. The Venezuela bond due 2027 lost 0.10 to 105 bid.

Meanwhile, emerging market debt showed resilience to Thursday's deadly transit bombings in London. The tragic events may mean a reallocation of assets into emerging markets, according to the Refco strategist.

"This is going to bring new funds into the [Latam] region," he remarked.

"It doesn't have to be right away after the terrorist events. It could be over time in the next month or so," he said.

"The fundamentals of the region remain very strong. Politically, we are not in the election cycle that we will see next year."

Furthermore, he added that the Latin American region is slightly more isolated from terrorist attacks.

"The yield, compared to what the rest of the world is offering, is attractive. The fundamentals are attractive," he said.

Peru's successful local auction

Peru sold 1.5 billion soles or $462 million equivalent in 12-year domestic bonds at a yield of 8.6% on Thursday to help prepay $1.552 billion of Paris Club debt.

Peru had intended to issue 1 billion soles, but left the door open for an additional 500 million soles more if there was enough demand.

Dollars from overseas investors flooded the market, according to an analyst note.

The sol even hit a 6½ year high at 3.25 per dollar.

The new 12-year bond adds to the local curve, which previously went out as far as 2015.

Demand for the new August 2017 issue was three times greater than the original amount offered, said another analyst.

Peru also plans to sell $1 billion to $1.5 billion in an international issue of 15- to 30-year bonds in the next couple of weeks to fund the deal. Bernal expects to see the deal as soon as next week.

"They still have two weeks to pay the Paris Club, but it has to come at some point. Timing will be an important issue here," he said.

This is a "positive" kind of debt restructuring, he cited, saying it was an important step for the country.

"The reason why they are paying back the Paris Club is not because of issues having to do with net present value calculation but rather with issues having to do with reputation.

"They are moving from obligations having to do with multilateral agencies to market-based instruments in order to further develop or normalize the portfolio of debt of the country.

"It's a step that tends to look ahead in time in terms of the well-being of the country, but it is not necessarily cheap," he added.

Furthermore, the dollar-denominated sovereign issue will garner demand because international conditions for placing debt are supportive, said Bernal, saying that "they are the best that they have been in many years with average risk premiums in the emerging region at only 300."

"Peru is trading right now at 200 basis points above the U.S. Treasuries, which is significantly tighter than it was a couple of months ago, not even talking about a couple of years ago.

"The market is telling me that the interest will be quite large," he observed.

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