Spreads tighter after Fed announcement; Telefonica Moviles Chile, KazMunaiGas price deals

By Christine Van Dusen

Atlanta, Nov. 3 - Emerging market investors and issuers seemed to be holding their collective breath on Wednesday - with just Telefonica Moviles Chile SA and KazMunaiGas pricing notes - until the Federal Reserve's afternoon announcement that it would buy $600 billion in bonds by the end of June 2011 to spur the economy.

Though this plan for further quantitative easing came as no shock, and came in at the lower end of estimates, investors were surprised that the average duration of the paper would be a shorter-than-expected five to six years.

Investors had, on Tuesday, bought up longer-duration paper from the likes of Colombia, Brazil, South Africa and Mexico with the expectation that the Fed would focus on the long end of the curve.

This "pushed stuff to the tights of the year in anticipation of the announcement," a Connecticut-based trader said.

After Wednesday's announcement about the shorter duration, that EM paper seemed "too rich," he said. And Treasuries took a beating, down almost 2½ points on the day.

Bids hold up well

"There's short-covering going on with those same credits," the trader said. "Once the short occurs, unless we get a hearty bounce in Treasuries, I think the long-end paper, and the sovereigns, are going to start to move lower in a hurry."

For Wednesday, though, bids were "a little sticky," he said. "Dealers continue to buy at dips and are acting a little too soon, watching equity prices, which happen to be up at the moment. It's not necessarily a good thing for long-duration fixed income assets."

As an example of the way bids are holding up well, he pointed to Mexico's recent $1 billion 5¾% 100-year notes that priced in October at 94.276 to yield 6.1%, or Treasuries plus 235 basis points.

"It's now trading at inside of 170. It's still at the tights of the year," he said. "The bids are just holding up very well while Treasuries are getting taken to the shed."

The JPMorgan Emerging Markets Bond Index Plus ended the day 7 bps tighter, with Argentina tighter by 25 bps, Venezuela by 24 bps and Turkey by 15 bps.

Telefonica, KazMunaiGas price

The primary market was mostly quiet, save for two new deals.

Telecommunications company Telefonica Moviles Chile priced $300 million 2 7/8% senior notes due Nov. 9, 2015 at 99.727 to yield 2.934%, or Treasuries plus 180 bps, a market source said.

BBVA Securities, Citigroup and Deutsche Bank were the bookrunners for the Rule 144A and Regulation S notes, which are non-callable.

And Kazakhstan's state-owned oil and gas company, KazMunaiGas, priced $1.25 billion 6 3/8% notes due April 9, 2021 at 98.147 to yield 6 5/8%, or Treasuries plus 408.4 bps, a market source said.

Credit Suisse, RBS and UBS were the bookrunners for the Rule 144A and Regulation S deal, which was talked at the 6¾% area before launching at 6 5/8%.

"I think, in general, the primary is going to slow down as we get closer and closer to Thanksgiving," a source said. "It will start dying off for the year. Demand is becoming less voracious. We should start to see the deals trail off a little bit in size and amount."

The issue, he said, is that "they'll have to come at more generous terms to get people excited. They're going to start shutting down for the year now."

Some issues will get in "under the door," he said. "But they're going to have to be more price-aggressive to get them done successfully."

Sinochem, Mriya Agro plan deals

Even so, several issuers continued moving toward the market, including Hong Kong-based Sinochem Overseas Capital Co. Ltd. The business conglomerate subsidiary's planned two-tranche issue of notes was whispered at a yield in the low-200 bps area for the 10-year notes and the mid-200 bps area for the 30-year notes, a market source said.

Citigroup, HSBC and UBS are the bookrunners for the Rule 144A and Regulation S deal, which includes a change-of-control put at 101% when Sinochem ceases to own 100% or if the sovereign ceases to own at least 50.1%.

Also on Wednesday, Ukraine-based agriculture producer and trader Mriya Agro Holding mandated Bank of America Merrill Lynch and UBS for a dollar-denominated offering of bonds, a market source said.

A roadshow is underway in Europe, Asia and the United States this week for the Rule 144A and Regulation S deal.

And Chile-based retail company Cencosud SA has mandated JPMorgan, Deutsche Bank and Santander for a possible issue of up to $900 million in bonds.

Proceeds from the deal, which is expected to come to market by the end of the year, will be used to refinance debt.

Market sources were also saying that Argentina-based candy maker Arcor's planned $200 million seven-year notes - which are finishing up a roadshow and have been whispered at a yield in the 8% area - are oversubscribed.

Some selling in Brazil

Also impacting Wednesday's picture was the results of Brazil's elections. With Dilma Rousseff's win in the second round of the presidential race, as well as gains for her party, the president-elect "will have a strong mandate and power base," according to an RBC Capital Markets report.

And though the market is now focusing on Rousseff's possible cabinet choices, it's safe to assume "she will likely choose cabinet members that she believes can effectively carry out her policy preferences," RBC said.

Therefore, "a focus on policy implications for markets will be a far more effective strategy for investors," the report said.

It's likely the new regime will aim to increase the role of government in the economy and continue to curb the real's appreciation through further taxes on foreign investment and other measures, RBC said.

The market's reaction was muted, given that Brazil has been on holiday, but "the currency was modestly stronger," a source said.

Said the Connecticut trader: "We have seen small selling by locals in the long end of the Brazil curve but offshore buying in the long end. Brazil's longer duration has been trading at Treasuries plus 135 bps - very, very well bid for the time being."

Another source concurred: "There seems to be a lot of positive momentum with Brazil."

PDVSA won't issue paper

Also from Latin America, sources say Venezuela-based oil company Petroleos de Venezuela SA (PDVSA) will not issue any paper in 2011.

That's seen as a "positive" for Venezuela and PDVSA bonds, according to an RBC report, given that the corporation recently issued $3 billion due in 2017.

But "they have made similar statements in the past" and "still issued," the report said.

PDVSA could reopen its swap of 2011 bonds for 2013 bonds next year, RBC said, in a "signal that participation could be low."

In other news, inflows into emerging markets bond funds slowed for the fourth week of October to $710 million, according to data tracker EPFR Global.

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