Emerging market debt trades flat; Russian Standard Finance sells upsized $500 million five-year bonds

By Reshmi Basu and Paul A. Harris

New York, Sept. 30 - Emerging market debt traded flat Friday, unresponsive as the 10-year Treasury note stabbed the technical barrier of 4.33%.

Meanwhile in the primary market, Russian Standard Finance SA priced $500 million of five-year notes (expected ratings Ba2/BB+) at par to yield 7½%.

The issue, increased from $300 million, came inside of price guidance. Guidance had been set at 7 5/8% to 7 7/8%.

ABN Amro and HSBC ran the Rule 144A/Regulation S transaction.

Also out of Russia, JFC Group Ltd. priced an upsized $60 million debut eurobond issue.

JFC International's non-rated 1.5-year loan participation note priced at par to yield 9¾%.

HSBC ran the books for the public issue.

And National Bank of Ras Al Khaimah (RAKbank) priced $200 million of five-year bonds (Baa1/BBB+) at par to yield six-month Libor plus 55 basis points.

The transaction comes off the issuer's euro medium-term note program.

Standard Chartered Bank and National Bank of Abu Dhabi acted as joint lead managers.

In other news, Gazprom announced on Sept. 28 that it would buy Sibneft for $13.09 billion. The market is anticipating that Gazprom will borrow heavily from banks, said a market source.

The source added that the recent flattening of the Gazprom curve is an entry point for investors who want to add more Gazprom paper.

EM trades flat

Economic news out of the United States Friday fueled more speculation that the Federal Reserve will not pause its monetary tightening campaign. The yield on the 10-year note jumped to 4.33% from Thursday's close of 4.30%.

Nonetheless, emerging market debt remained stubborn in the face of higher Treasury yields, as it was unwilling to react, which sources said was a positive sign for the asset class.

"It hasn't advanced anymore really," remarked Enrique Alvarez, Latin American debt strategist for research firm IDEAglobal, who described the market as "stalled."

"Latam has gone again without a reaction.

"There was a little bit of a pull back in Mexico," he commented.

During the session, the Brazil bond due 2040 gained 0.20 to 122.60 bid. The Mexico bond due 2026 lost half a point to 160½ bid. The Venezuela bond due 2027 fell 0.35 to 118.30 bid.

Flows into the market were not the reason behind the market's resistance to the up tick in Treasury yields, noted Alvarez.

"There hasn't been a lot of volatility. You haven't seen a lot of volume.

"I think it's a story of people just being very comfortable with their level of investments in the market," he observed, adding that investors appear unfazed by higher Treasury yields at the moment.

One reason behind investors' aggressive stance is the belief that there will be a few more interest rate hikes - but that over time the United States will enter a soft patch, which increases the probability that the Fed will reverse its tightening campaign.

"Looking at the medium- to long-term, investors are banking on that and accumulating as much yield as they can," noted Alvarez.

"And the only place to find yield these days is in emerging markets."

But he warned that the market is being over-enthusiastic. For instance, domestic markets on the equity side are at highs, he noted.

"The currencies have basically run wild. There was a little bit of pullback in the [Brazilian] real today [Friday].

"There's a huge sentiment emanating that nothing can go wrong in Latin America right now," he said, adding that commodity prices and the interest rate scenario is giving support.

"I think expectations are way out of line with the realities of the market," especially as the election season approaches in 2006, said Alvarez.

"It's like a runaway train. And that's how the market has been acting like in the last few weeks."

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