Emerging markets mixed on light flows; new issues trade well; Usiminas prices

By Aaron Hochman-Zimmerman

New York, Jan. 11 - Emerging markets saw trading volumes down as equities sank to end a frenzied week on Friday.

Prices were softer to mixed, but despite further headline shock from the major markets, Argentina led the winners as its discount bonds due 2033 were up by 0.8.

Largely, "investors are looking to sell at the long end of the curve," a syndicate desk official said, but "activity has been fairly light across the board."

Tone was actually slightly improved by the end of the session, despite the pullback in equities, a trader said.

Meanwhile, Federal Reserve chairman Ben Bernanke's speech on Thursday left many to speculate over what the central bank will do to help the faltering U.S. economy.

The Fed will cut rates by 75 basis points to 100 bps over the next stretch of meetings, a market source predicted.

The meeting on Jan. 30 is likely to produce a 50 bps cut, but any emergency actions in the interim would come as a mild surprise, the source said.

The source considered the speech a cue to buy emerging market currencies.

While Merrill Lynch prepared to take a $15 billion writedown and Northern Rock sold off $2.2 billion in mortgage assets to JP Morgan, the primary pipeline remained open.

Brazil's Usinas Siderurgicas de Minas Gerais SA priced a $400 million 10-year bullet bond at 99.127 with a 7¼% coupon.

Late Thursday, Indonesia also priced two tranches worth a total of $2 billion.

At the end of the hectic week, $600 million of inflows entered emerging markets compared to a loss of $240 million during the week ending Jan. 2, according to figures compiled by EPFR Global.

Volatility bounced higher throughout the day, ending up 0.23 to close at 23.68, according to the VIX index. The index is a commonly used gauge of market volatility.

As Treasuries rallied, emerging markets widened by 6 bps to a spread of 255 bps, according to JP Morgan's EMBI+ index. The EMBI+ calculates the amount of extra yield investors demand to hold money in emerging markets debt.

Asian credits beat equities

Asian credits traded in light volumes which was typical for a Friday afternoon, a trader said, but the slight activity may have served to keep prices higher while equities were suffering.

The Philippines' bonds saw "very heavy" trading, a trader said as they were pulled up by the success of Indonesia's new sovereigns.

Meanwhile, the national monetary board has given the government permission to issue $500 million in debt.

The government's original plan to issue a $1 billion sovereign was supported by whispers around the market that the final product may be upsized, the trader said.

The offer is expected in the first quarter of 2008 and will complete the country's foreign borrowing program for the year.

"They're talking about it coming ... likely next week," the trader said.

The Filipino bonds due 2030 were quoted at 130.375 bid.

Indonesia's new sovereigns performed well during their first trading session.

The bonds 7.75% bond due 2038 "outperformed," the trader said.

They were quoted up 2 points at approximately 102 bid.

The 6.78% bonds due 2018 added about 1.125 and were seen at 100.625.

Also, one of Indonesia's leading economists recommended that the central bank return to a managed floating exchange rate for the rupiah, rather than the freely floating rate it has used since 1997, the Jakarta Post reported.

The rupiah was seen trading at 9,428.4 to the dollar.

The Indonesian sovereigns due 2017 fell 0.25 to approximately 100.75 bid, 101.25 offered.

"The issues [due 2018 and 2038] were priced to sell, which pressured the rest of the existing bonds down," an emerging markets strategist said.

The Korea Development Bank, which priced $1 billion of five-year bonds at 99.857 with a spread of 218 bps on Thursday, saw those new securities trade tighter by 13 bps to near 205 bps.

Pakistan's sovereigns due 2017 held still near 83 bid.

Elsewhere, China reported a record high trade surplus of 48% in 2007.

Exports from China remained ahead of imports by $262 billion, largely because of its undervalued currency, its critics say.

Pipeline undeterred by high supply

Concerns of oversupply stopping the flow of new issues were again dashed as deals continued to price, albeit at buyer's levels.

Brazil's Usiminas (Baa3/BBB-/BBB-) priced a $400 million 10-year bullet bond at 99.127 with a 7¼% coupon and a spread of Treasuries plus 356 bps.

Initial guidance was offered at 7 3/8%.

JP Morgan and UBS acted as bookrunners for the deal.

Usiminas is a Belo Horizonte, Brazil-based steel producer.

"It went fairly cheaply," said a syndicate desk official.

After freeing to trade, the bonds added about 0.625.

Indonesia (Ba3/BB-/BB-) priced its 10- and 30-year tranches worth $1 billion each late Thursday night.

The bonds due Jan. 17, 2018 priced at a discount at 99.466 with a 6.78% coupon to yield 6.95%.

The bonds due Jan. 17, 2038 priced on top of talk at par to yield 7¾%.

Barclays, HSBC and Lehman Brothers were asked to bring the deal.

The deal was "definitely over-subscribed," said a source familiar with the deal.

The book was "really global" with interest from "all the major buying centers," the source said.

"It gave folks a clear view that there's definitely liquidity out there ... particularly for sovereign names," a syndicate desk official said.

"A lot of the dedicated funds are looking for more sovereign exposure," the official said.

The heavy primary flow during the week was "helpful" for Indonesia, the official added, rather than causing an over-saturation of the market.

"It's trading fairly well," another syndicate official said.

The 30-year issue was spotted up by as much as 2.25, while the 10-year issue was better by about 0.375.

Also, India's Bank of Maharashtra priced a Rs. 2 billion offering of 9.2% unsecured, non-redeemable subordinated tier II bonds, which will mature in 123 months.

The issue opened Friday and closed, fully subscribed, a few hours later.

Bank of Maharashtra is a Pune, India-based bank.

LatAm calms after wild week

Latin American trading stayed above the equity tumble, but the busy week ended quietly.

The 7.125% Brazilian bonds due 2037 were quoted at 112 bid, 112.6 offered.

Argentina's inflation-linked peso bonds have held up well in 2008 while they were some of the worst investments in 2007, a market source said.

The economy is growing and inflation should have accelerated, but the official statistics do not reflect the growth, the source said.

The Argentine 8.28% discount bonds due 2033 gained 0.8 to trade at 96.25 bid, 96.75 offered.

During his first television address of 2008, Venezuela's president Hugo Chavez told the public that he and his new cabinet officers would begin a new offensive to enact his socialist reforms.

Chavez narrowly lost a referendum vote on the reforms which included greater presidential influence over the oil industry and economy, as well as the abolition of term limits.

The 9.25% government bonds due 2027 fell in the light trading by 0.5 to 103.75 bid, 104.25 offered.

Emerging Europe ends week quietly

Without a new issue to stir the pot, emerging Europe remained in the background among the emerging market sectors.

Volumes were light as investors were anxious to leave behind a week darkened by headline storm clouds.

Russia and Japan have laid the initial groundwork for a joint $3 billion investment fund, the Itar-Tass News Agency reported.

Those working to establish the fund believe that it has the potential to grow to $10 billion in its early stages.

The fund is expected to invest heavily in construction related industries, particularly those surrounding the 2014 Winter Olympic Games in Sochi, Russia.

Also, the European Commission expressed its opposition to OAO Gazprom's proposed buyout of Serbia's state-oil firm Naftna Industrija Srbije (NIS).

If Gazprom is allowed to purchase a majority stake in NIS for €400 million, it may jeopardize Serbia's request to join the European Union.

Because it indirectly suffered a cutoff during Russia's 2006 oil battle with the Ukraine, Belgrade is particularly interested in the completion of the South Stream pipeline.

Ukraine's oil producer Naftogaz was given a rating upgrade by Standard & Poor's based on having its debt guaranteed secured in the government's 2008 budget, a market source said.

The Naftogaz notes due 2009 were seen up slightly at 97.25 bid, 99 offered.

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