Emerging market debt trades flat to higher; Gazprom to issue €1 billion 10-year bonds Friday

By Reshmi Basu and Paul A. Harris

New York, May 19 - Emerging market debt saw further spread tightening on follow-through from Wednesday's rally.

In the primary market, Gazprom cancelled the dollar-denominated portion of its dual tranche offering (Baa3/BB-/BB).

Instead Gazprom plans to issue a single tranche on Friday, structured as €1 billion of 10-year loan participation notes. Price guidance has been set in the 6% area.

ABN Amro and Credit Suisse First Boston are running the Rule 144A/Regulation S deal.

And the Development Bank of Kazakhstan is expected to shortly begin presenting to investors a $100 million eurobond offering, according to a market source. The notes are expected to carry a maturity of between 10- and 15-years.

UBS Investment Bank will run the books.

EM trading flat to higher

A benign reading of the consumer price index in the United States sparked higher returns Wednesday for emerging markets.

The CPI numbers created more of a comfort zone for investors, according to a sellside source.

"People are seeing more stability. [U.S.] Treasuries are holding on," said the source.

He added that emerging markets were doing better compared to high-yield and high-grade markets.

"The [EM] market had quite a rally on Wednesday," said a buyside source.

"Today [Thursday] it seems kind of quiet. I don't think much is going on now.

"I think it was more technical buying yesterday [Wednesday]," remarked the source.

"This morning I am hearing that there is quite a bit of selling - mostly from locals in Brazil.

"We basically are at the top of the range, with the Brazil 2040s at 115.50. So locals are probably selling into this rally. And the Street seems to be taking most of these bonds for now," noted the buyside source.

The Brazil C bond ended Thursday's session unchanged at 101 bid while the bond due 2040 moved up 0.55 to 115.55 bid. The Russia bond due 2030 gained 0.18 to 107.93 bid. The Venezuela bond due 2027 rose 0.35 to 98 ¼ bid.

However, the burning question is just when real money will come back from the sidelines.

"It seems that people are not so sure where we are. If you look at the whole picture, we are at very low U.S. rates in general and we have inflation," said the sellside source.

"So it doesn't make sense to have these low rates.

"The Fed is going to keep on raising rates and we still have the same rates on Treasuries as we had when they stopped cutting them," he added.

A market correction would bring back real money, but that is easier said than done.

"The whole market is so tight, you would have to have a lot of people shorting the market to have an adjustment.

"I don't think people are doing that at this point."

Higher price talk, requests investor

Nonetheless, the buyside source added that price talk has been aggressively set on recently priced issues.

"We have stayed on the sidelines so far," said the source.

"If they want to get a deal done they have to make it attractive enough to sell the whole thing.

"It's tough to say who is buying these things at this point. They have kind of a window right now but I would not be putting fresh money into those deals right now because they are going to be cheaper," commented the source.

New paper from Turkey?

Looking ahead, it will take a series of "stable" economic data reports in the United States to bring back big-name issuers.

"Spreads are tightening," remarked the sellside source.

"If this goes on, we could see something next week in terms of new supply," he added.

One possible candidate could be Turkey, but much of that depends on whether the nation wants to jump the gun before May 29. On that day, the French will vote for or against the E.U. constitution in a referendum.

"I don't know if they are going to wait for the French vote. They have two options. If they are positive on the outcome of the referendum, they could wait. Because after that you would have a rally," he noted.

Even if Turkey is unsure of the outcome, it still needs money, he noted.

"So we could see them either reopening (which is the most probable thing), or issuing a benchmark. In this market, I wouldn't want to do that," the sellside source added.

He said that potential issuers "could run the risk of the market getting scared."

"Brazil reopened the bond and it went well. After that, the market crashed."

On May 10, Brazil reopened its 8 7/8% bonds due October 2019 (B1/BB-/BB-) to add $500 million. The retap priced at 100 3/8 to yield 8.827% via Goldman Sachs and Merrill Lynch.

"It was just a reopening for $500 [million]. I guess the best thing to do is to announce a reopening and see if the book builds in a healthy manner.

"If you go to market with a new issue, you run the risk of people trying to assess where the new one should be - if this is cheap or expensive.

"And you have a lot of interpretation on that - because maybe they're not expecting the French vote to be positive and that would cost Turkey a lot," he noted.

"Better to go for a reopening."

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