Russia moves with stocks, news; ING's Spegel sees fall calendar playing to low buyside cash

By Paul A. Harris

St. Louis, Aug. 25 - The ranks of emerging markets players remained thin on Tuesday as telephone calls to sources triggered voicemail responses and emails elicited automatic "out-of-office" responses.

The EMBI Global Diversified index stood at 387 bps bid, 4 bps wider, heading into the New York close, a market source said. The EMBI Plus index, meanwhile, was 372 bps bid, wider by 5 bps.

"There isn't much to tell," said a trader in London who focuses on Russia, Turkey and the Ukraine.

"It's been deathly quiet," added the source, who spoke at the close of the London market.

The tone of emerging markets remained positive as equity prices traded higher in Europe, and were doing likewise in early U.S. trading, the source said.

The economic data also helped, added the trader, who was referring to the Conference Board's Consumer Confidence Index which dramatically topped analyst's expectations, and the Standard & Poor's/Case-Shiller U.S. National Home Price Index, which posted its first quarterly gain in three years.

"The undercurrents are still strong, but there is very little that is actually printing," said the trader.

"In two weeks, when everybody is back and the new issue market reopens, we may see a little bit of volatility on the downside.

"But for now it's just ratcheting higher.

"Where there is interest, it's generally buying interest. And every day prices seem to be a little better than they were the day before."

Russia moves with stocks, data

Another London-based trader saw Russian bonds and CDS widen early in that session on the back of Monday's lackluster stock market performance in the United States.

However stronger Tuesday stock prices and the consumer confidence and home price data were generating a bit of tightening at the London close, the trader said.

Russia five-year CDS went out at 361 bps bid, 367 bps offered, after having closed Monday at 360 bps bid, according to the source.

The Russia 7½% bonds due in 2030 were 102 5/8 bid, 102 7/8 offered, 5 bps wider on the day - wider, but off the day's wides, the trader said.

Corporates followed a similar trajectory.

OAO Gazprom's CDS were around 5 bps wider on the day, but off the wides as well, the trader said.

Gazprom's 8 1/8% notes due 2014, the Russian gas giant's most recent issue, traded late in the London session at 103¼ bid, 103½ offered, and were about 5 bps wider on the day.

The fall calendar

Several factors point to a robust fall calendar, expected to begin shaping up on the other side of the Sept. 5-7 Labor Day holiday weekend in the United States, sources say.

Emerging markets issuers and their investment bankers are no doubt "licking their chops," waiting to get into a market that has a little bit of a bid to it, said a trader who expects a "reasonable flood" of new issuance in the fall.

David Spegel, global head of emerging markets strategy for ING, mentioned that fundamentals are reasonably strong and defaults are going down.

However, the strategist added, heading into fall, issuers have considerable funding requirements.

Sovereigns still have $11.5 billion to issue by year end, Spegel calculated, and added that some issuers would no doubt prefer to prefund their 2010 requirements.

Also corporates have a substantial amount of cash that they need to raise in the debt markets, just to cover coupon payments and amortizations, the strategist added.

"Provided that there are no serious market hiccups, that should be placed."

The possibility of indigestion

Reflecting on the "historic" amount of new issuance in July and August, Spegel wondered how much of a fall calendar dedicated emerging markets investors might easily absorb.

In July and August of 2009, dollar-denominated issuance came to just under $26.5 billion, easily more than doubling the next highest amount for that time frame, July-August 2004's $11.5 billion, according to Prospect News data.

"There is still some money on the sidelines," Spegel said.

"However with that record amount of issuance, a lot of the bonds came priced very attractively, and investors jumped in."

The result is reduced buy-side cash levels, the strategist said.

"It causes you to wonder whether, going into September, we might see some indigestion, particularly since investors want to maintain their cash positions at around 3½%, which is where they are now.

"To buy new issues they would have to sell existing bonds."

Spegel pointed out that an average cash position of 3½%, while not representing an historic low, is well below the dedicated accounts' five-year average of 5¼% to 5½% cash.

"Going into September there are a lot of companies that want to sell bonds, so it will be interesting to see what kind of impact it has," he said.

Argentina sees profit-taking

Finally, some profit-taking on Tuesday damped the recent rally in Argentina's bonds and CDS, ING's Spegel said.

The across-the-curve rally which began over the weekend, as investors learned that Argentina is working on a debt exchange targeting ARS 9 billion (approximately $2.3 billion) of inflation-linked bonds due in 2010, 2011 and 2012, carried through the Monday session.

However late Tuesday Argentina's dollar-denominated 8.28% discount bonds due in 2033 were down almost 2 points on the day at 62 bid, 63¼ offered, Spegel said. On Monday a trader spotted the same paper at 65 bid, 66½ offered.

Meanwhile Argentine CDS ended the New York Tuesday session about 30 bps wider, the strategist added.

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