Emerging market debt rides higher as fears ease over Russia's bank run; Ukraine, Gazprom to issue

By Reshmi Basu

New York, July 12 - Emerging market paper traded higher Monday as concerns over Russia's banking sector eased.

The Brazilian C bond was up 0.188 to 93.188 bid while its bond due 2040 was bid at 95.8, up 0.6.

In the primary market, Moscow-based OAO Gazprom, the world's largest natural gas producer, will kick off a European roadshow Tuesday for a dollar-denominated benchmark deal.

The roadshow will make stops across the United States from Friday though next Thursday.

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

Also in primary news Monday, the Ukrainian government is expected to tap the market with its second eurobond sale this year.

The government plans to sell either $600 million or €500 million of floating-rate notes (foreign debt B1/B) via Citigroup, Credit Suisse First Boston and Dresdner Kleinwort Wasserstein.

And Korea Development Bank set guidance for its benchmark offering of five-year global bonds (A3/A-/A-) at Treasuries plus 115 basis points to 120 basis points, according to a market source.

Pricing is expected mid-week via Barclays Capital, Credit Suisse First Boston and HSBC Holdings.

With the resurgent activity, the summer vacation may be coming to a premature end as issuers appear to be ready to hit the ground running before the next round of interest rate increases.

Recent deals such as the giant Aries Vermogensverwaltungs GmbH deal repackaging of Russian Paris Club debt and Brazil's two taps of the capital market have raised the question of whether there is too much supply in the market.

And while the supply side is fragile, the market should be able to absorb the new securities, sources said.

Of the retail major funds, no more money is coming in, according to a buy-side source.

But, the source added: "There's still strategic money coming into emerging markets. There is also amortization and coupons in July, especially from Brazil.

"I feel that it's not a bad moment for supply to be coming to the market.

"But it won't be positive. But I don't know if it will be a whole lot to dampen the market," he added.

Nonetheless, buyers will be looking at opportunities with caution.

"Unless the pace of rate hikes in the U.S. is really, really moderate and it's like the market is forecasting, it doesn't make sense to be owning much in emerging markets at the beginning of a rate hike cycle," noted the buy-side source.

Beating Hong Kong

Meanwhile, Asian issuers have been rushing in ahead of Hong Kong's HK$20 billion global bond issue, among them India's Export-Import Bank and Road King Infrastructure Ltd. of Hong Kong.

"I don't think the HK deal will be a problem - they're not really tapping the same investor base, so only a very few high-grade EM names are competition," said an emerging market analyst.

"But in general, I'd say excess supply is a growing concern, though we're not necessarily at a point yet where the market couldn't digest another deal.

"The Brazil deal went poorly, so that's a sign that appetite is not there for new deals from iffy credits.

"But solid BBB EM credits should still have relatively little trouble coming to market, and even some of the less stellar names - Peru, Ukraine, etc - may still be able to get something done.

"The continued rally in USTs [Treasuries] is the real driver - so long as the U.S. rates outlook remains positive or even just neutral, the EM primary market should remain more or less open.

"In the medium term, though, I think the new supply is finally going to tap out the market, just when the rally in USTs is coming to an end," he added.

Paper up on Russia, Brazil effects

Emerging market paper traded higher during Monday's session. Brazil, Venezuela and Russia were up.

"The concerns about Russia last week that put some pressure on the market subsided today [Monday]," said a debt strategist from Refco EM.

"There are some reports out there that the situation with the banks is not bad as it originally appeared.

"That has given the market some confidence.

"The technical factors due to the new Brazilian bond issued last week improved. You see some better buying in the market today [Monday].

On the other hand, investors will also be looking closely at the upcoming slew of economic data this week.

U.S. June retail sales will be released on Wednesday, followed by the consumer price index data on Friday.

"We have to wait to see which direction these reports will take the local U.S. Treasury market," said the debt strategist.

Also helping emerging markets debt Monday was the release of Mexico's industrial output number, which has risen for six months.

Also, one of the largest money managers in the region came out with positive comments about Brazil and Russia, said the Refco EM strategist.

Say "yes" to Venezuela

Despite its political turmoil, Venezuela is a good buy, according to the strategist.

In August, Venezuelan president Hugo Chavez will face a recall referendum.

"If he stays in power, I think the democratic process is taking place and should reinforce the level of risk that Venezuela offers.

"On the other hand, the high cost of oil will definitely benefit the current accounts in the country - the balance of payments in the country.

"The price of a Venezuelan barrel of oil is close to $33. The budget is approximately $10 below that.

"There's still plenty of liquidity," he noted.

On the other hand, as the most liquid market, Brazil is the most vulnerable to the tightening of U.S. monetary policy by the Federal Reserve.

"If the Treasury market in the U.S. is under pressure, we will see Brazil, being the most liquid market, being punished," he said.

And Mexico is another credit that is very much related to what is happening in the U.S. market.

In particular, inflation is a concern.

"In the last three weeks, the number has been benign and the monetary authorities have not taken any action, the strategist said.

"If interest rates [in the United States] are increased, we will see the interest rates in Mexico follow the same track," he noted.

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