EM regains footing but lags Treasuries; Brazil, Philippines, Venezuela higher; Colombia places peso issue

By Paul Deckelman and Aaron Hochman-Zimmerman

New York, June 13 - Emerging markets debt lagged the gains in U.S. Treasuries Wednesday but the consensus held that EM felt better, with a smattering of higher prices and tighter spreads among some of the benchmarks.

Against this uncertain backdrop, with players inspecting their positions relative to recent volatility in stocks and Treasuries, the primary market generated a modicum of news in the sovereign space as well as in the corporate sector.

EMBI four wider

With the gains in U.S. government paper, which sources suggest may have been oversold after being in full retreat for well over a month, emerging markets lagged behind during the mid-week session.

Participants noted that recently beleaguered U.S. Treasuries pulled out of the steep nosedive that had carried the yields on that government paper way above the psychologically potent 5% mark, to their highest levels in five years.

That rebound - the biggest since February - translated into a better market tone and a move upward in some emerging prices, although compared with Treasuries, EM yields failed to fall at the same pace, with many issues suffering a relative widening out.

The widely followed EMBI+ index compiled by JP Morgan widened out by 4 basis points on the day compared to Treasuries, to 160 bps.

That leaves that market gauge around a dozen basis points above the all-time tight levels it hit as recently as the beginning of June.

Emerging market debt slid badly on Tuesday as market participants reacted to comments by former U.S. Federal Reserve Board Chairman Alan Greenspan, who warned that recent historically low premiums on EM debt cannot continue and spreads relative to the U.S. 10-year bonds "are going to start to open up."

'All over the place'

A New York-based trader in Latin American debt said that Wednesday's market was "kind of a whipsaw - it looks like someone oversold Treasuries [Tuesday] and they came back today."

He saw prices in his market "all over the place, depending on the credit."

With Treasuries rising Wednesday after investors were lured back into them by the highest yields and lowest prices in five years - the benchmark 10-year paper came in fully 9 bps to 5.20% - and with many EM bonds underperforming, the trader saw a number of emerging names widen out by anywhere from 5 bps to 15 bps.

Among issuers which have widened out versus the U.S. paper, he said, were Brazil, Venezuela, Ecuador, Panama and Peru.

"The market is just trying to figure out where it is," he said.

Most names in his sector "did not rise as much as Treasuries did."

Among the notable relative underperformers this week, he said, were Argentina's bonds, and "Vennie [Venezuela], as usual," as the market for the latter nation's debt remains roiled by the ongoing political turmoil there, with president Hugo Chavez drawing criticism for trying to bring opposition media voices under state control, as well as by continued uncertainty over whether he will make good on his threat to pull his nation out of the International Monetary Fund, which could trigger a bond default.

The trader also saw the longer end of the curve among Brazil's bonds as underperforming.

He reiterated, though, that things were "all over the place, depending on the credit and the maturity," with nothing especially standing out.

"People are just trying to get a handle on it."

Brazil bonds move back up

A source at another desk saw the most widely traded EM issue, Brazil's 11% dollar-denominated global bonds due 2040, as having risen ¾ point on the day to bid levels above 130.5. Its yield was down 8 bps on the day to 6.17%.

Brazil's local-currency real-denominated bonds were seen improved after the government said Latin America's largest economy grew less than expected in the first quarter, which spurred speculation that the country's central bank may continue its recent series of interest rate cuts, or even intensify them.

The benchmark zero-coupon bonds due 2008 were quoted yielding 11.27%, 1 bp tighter than Tuesday's levels, after Brasilia reported that the country's first-quarter gross domestic product grew by 4.3%, somewhat less than the roughly 4.8% analysts were looking for.

That benign inflation data signaled fixed-income investors that the central bank, which next meets on July 17-18, is likely to keep the ball rolling on interest rate cuts.

The bank slashed its benchmark overnight rate just last week by 50 bps to 12%. Since September 2005, the bank has lowered that key rate by more than one-third, 7.75 percent points, in hopes of spurring faster - though still not inflationary - growth.

Venezuela rebounds, Colombia retreats

A market source saw Venezuela's recently very hard-hit benchmark 9¼% dollar-denominated bonds due 2027 up more than 2 points on the session to 109.375, while its yield tightened 20 bps on the day to 8.29%.

Elsewhere in the region, Colombia's peso-denominated local-currency bonds were lower in Wednesday's trading, giving back some of the gains notched on Tuesday, when the big news in the local debt markets was the sale of $1 billion equivalent of new 20-year peso bonds, the proceeds of which will be used to repay dollar-denominated debt.

In Wednesday's dealings, the 11% benchmark peso bonds due 2020 was seen down 1/3 point to just under the 108.5 level, while its yield - which on Tuesday had tightened some 8 bps - gave back 4 bps of that pickup to finish at 9.80%.

The bonds fell in line with a slide in the peso, which suffered its biggest plunge in two months on investors' risk-aversion concerns.

Asia remains wary

Earlier, in Asia, bond prices were a little firmer by the end of the day from their opening, taking their cue from the overnight rally in Treasuries. However, they were still below Tuesday's close there - a sign that some investor wariness remains.

The benchmark Philippines government dollar-denominated bonds due 2031 were quoted at 108.875 bid, 109.375 offered, up about 1/8 point from the opening, although below the 110.375 where they had left off on Tuesday.

The 2032 issue was quoted at 94.125 bid, 94.625 offered, up a little on the day, but still about a point off Tuesday's ending.

While the cash bonds were down day-over-day, five-year credit default swaps were only marginally higher at 102-106 basis points, versus 101-104 bps the day before.

Earlier in the session, those CDS prices had widened out to as much as 108 bps, before moving off those peaks and back downward.

Elsewhere in the region, China's local-currency yuan-denominated bonds were seen higher, as that country's currency unit rose to its highest level since 2005, pushed upward by forex market chatter that China will allow faster gains as a means of helping ease trade tensions with the United States.

The 2.93% bonds due 2009 were quoted up about 0.10 to the 99.6 level, and their yield tightened by 5 bps to 3.10%. The bonds had rebounded late in the Asian trading day from earlier intraday losses sparked by a central bank report indicating that Chinese household savings fell for a second straight month; that shortfall left banks - the biggest bond-buyers - with less cash to purchase debt.

Primary market activity

In the primary market there was news from the sovereign sector, as the Republic of Colombia priced $1 billion of 20-year paper and Lithuania disclosed plans to bring a benchmark-sized euro-denominated deal for which it has mandated SG Corporate and Investment Banking and UBS Investment Bank.

Very little was heard, Wednesday, from the corporate space. However timing emerged on a deal from Indonesian seafood producer, PT Central Proteinaprima.

"I think issuers can wait a week or two," an emerging markets analyst reflected during a Wednesday conversation with Prospect News.

"But they're going to get nervous if it's early July and they still haven't been able to come to market," the source added, noting that by late July the market will more or less shut down until early September.

It is possible that a late-summer rush to complete deals could materialize, the source added.

"I think we'll see a number of issuers decide to take the money while they can, even if the primary market is not as healthy as it was a month ago, and they have to pay a little higher price to get deals done," the analyst said.

Colombia prices $1 billion

Colombia priced $1 billion equivalent of 20-year notes (Ba2/BB+/BB) at par to yield 9.85%.

Citigroup and Deutsche Bank were the bookrunners.

The notes will be denominated in pesos but all payments will be made in dollars.

Order totaled $5.2 billion, with the majority of the interest from the United States in addition to some light local and European interest.

UAE, South African banks price

From throughout the emerging markets, financial institutions continue to work bond deals through the market.

South Africa's First Rand Bank priced its €500 million five-year notes with a coupon of Euribor plus 50 basis points.

The price was on the tight end of initial guidance set at Euribor plus 50 to 55 bps.

The notes were sold at an original issue discount of 99.775.

Citigroup and RBS handled the books.

Banco Hipotecario talks $200 million

Banco Hipotecario SA released talk in the 11.375% area for its planned $200 million Argentine peso-linked three-year issue (Ba1/B+).

Citigroup, and Deutsche Bank will run the books.

The Buenos Aires, Argentina-based commercial and investment bank will hold its roadshow through Wednesday.

Pricing is expected Thursday.

Elsewhere Russia's International Investment Bank (IIB) plans to issue €150 million to €200 million of bonds.

The roadshow began Wednesday in Hong Kong.

A source close to the deal said that despite unfavorable the recent sell-off in emerging markets there is "healthy interest in the IIB deal."

Proteinaprima to bring $400 million

There was scant news from the corporate sector on Wednesday.

PT Central Proteinaprima will start a roadshow on Wednesday for a $400 million offering of senior notes (B1/B+) to be issued by Blue Ocean Resources Pte Ltd.

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