Emerging markets glide higher; South Africa, Psalm price benchmark bonds; tone seen strong

By Aaron Hochman-Zimmerman

New York, May 19 - Emerging markets stepped higher on Tuesday but without great enthusiasm.

The secondary market took a back seat to new benchmark deals from South Africa and from the Philippines' Power Sector Assets and Liabilities Management Corp.

The two combined to price $2.5 billion as the market seemed ready to take on any new issue dangled in front of it.

Some doubted the size of the market's appetite for less prominent issuers, but many agreed that the money on the sidelines is more than ready to be put into the right issue.

In trading, Asia was the strong sector despite the new supply.

As a show of the sector's resilience, Indonesia's bonds due 2019 added 3 points, while the Philippines added 2 points to its bonds due 2030.

From the major markets, volatility burrowed below the psychologically significant 30.00 mark as it gave up 1.44 to 28.80, according to the VIX index. The index is a commonly used measure of market volatility.

As a sector, emerging markets wound tighter by 8 basis points to a spread of 478 bps, according to JPMorgan's EMBI+ index. The EMBI+ determines the amount of extra yield investors will demand to hold assets in emerging market debt.

South Africa, Psalm price

South Africa priced $1.5 billion 10-year fixed-rate bonds at 99.189 with a coupon of 6 7/8% to yield 6.989%, or Treasuries plus 375 bps (Baa1/BBB+/BBB+).

The bonds priced tight to the talk of Treasuries plus 387.5 bps.

Barclays Capital and JPMorgan acted as bookrunners for the Securities and Exchange Commission-registered deal.

Standard Bank acted as co-manager.

The bonds traded up to 100 3/8 bid, 100 7/8 offered.

For the stronger issuers like "the South Africas and [OAO] Gazprom, there's plenty of cash out there," a trader said.

Still, the market has longer to wait before "it's there farther down the food chain," he said.

The Philippines' Psalm priced $1 billion 10-year senior unsecured bonds at 99.127 with a coupon of 7¼% to yield 7 3/8% (B1/BB-/).

The bonds priced at the wide end of talk that was in the 7½% area on behalf of the public utility Napocor.

Deutsche Bank, HSBC and Morgan Stanley acted as bookrunners for the deal.

Psalm is a Manila-based government run power company.

The bonds traded up by as much as 1 3/8 points but faded into the close, another trader said.

Emerging Europe follows equities

At the trading desks, emerging Europe was nearly "tick for tick with the S&P, it seems, on the stuff that's really liquid," a trader said.

The week is beginning to track a "ball bouncing up the stairs" pattern, he said as things are "still constructive.

The otherwise strong market was hampered by another default in Kazakhstan, this time of the Astana Finance 9% bonds due 2011.

"People are trying to figure out what it means," the trader said. "The rest of the market's been strong."

In Russia, "according to preliminary forecasts, we can say that the slump in the Russian industry may reach minus 4% and minus 6%," said industry and trade minister Viktor Khristenko, according to the Itar-Tass News Agency.

The Russian government bonds due 2030 were spotted at 101 3/8 bid, 101½ offered.

Meanwhile, "there's been decent turnover in the solid Russian corporate," the trader said, such as JSC VTB Bank and OJSC Vimpelcom.

The Vimpelcom bonds due 2016 were quoted at 79¼ bid, 80½ offered.

In Turkey, president Abdullah Gul was ordered to face embezzlement charges by an Ankara court.

Gul is accused of misappropriating funds from the government treasury, which were to be used by his now-defunct Islamist Welfare party in 1997.

Protestors demanded the decision be appealed.

The Turkish sovereigns due 2030 were seen at 149.9 bid, 150 offered.

Elsewhere in the category, Ukraine's bonds due 2016 were seen at 69 bid, 72 offered.

Quiet gains in LatAm

Latin America suffered through a "sort of a ho-hum day," said Enrique Alvarez, a Latin America debt strategist at think tank IDEAglobal.

After a wash of mixed economic data on Monday, "today was a much quieter environment," he said.

"The LatAm data is out of the way, and now you're digesting it," he said, but the tone held and the situation seems "less grave than what it appeared to be a few weeks back."

Volatility ducked below 30.00 for the first time since the sinking of Lehman Brothers, according to the VIX index, and the stable seas kept tensions light, but "we're not breaking into any new highs," he said.

The category remains very similar to U.S. high grade with Merrill Lynch trading near 500 bps and JPMorgan's EMBI+ at similar spreads.

In Brazil, the expectation of the new 10- and 30-year bonds is not imminent, but "it will be coming," Alvarez said, as the primary remains open, "and very much so."

The 7 1/8% Brazilian government bonds due 2019 were unchanged at 101.05 bid, 102¼ offered.

In Colombia, defense minister Juan Manuel Santos stepped down and is expected to enter the presidential race in 2010 if current president Alvaro Uribe does not seek a third term.

Santos has been lauded for successful raids against the FARC rebels and has said he would be willing to send troops across the Venezuelan border in pursuit of the leftist guerillas.

Meanwhile, many investors across the sector were drawn from fixed income by big gains on equity indexes, particularly in Mexico and Peru, Alvarez said.

The 8 1/8% Mexican bonds added 0.4 point to 102.65 bid, 103.4 offered.

Argentina looked strong as it added 2¼ points to 37 bid, 37¼ offered, while in Venezuela, the 9¼% sovereign bonds due 2027 were unchanged at 64 bid, 65 3/8 offered.

Asia strong still

Asia was pushed forward by the Psalm deal, which "helped the overall tone on the sovereign side, at least," a trader said.

The offer book, which was nearly five-times oversubscribed, "crystallized how much demand there is out there," he said.

On the trading side, the investment-grade names in South Korea continue to tighten 10 bps to 15 bps per day while the sovereign comes in 5 bps to 10 bps per day, he said.

The Korean five-year CDS was seen at 272 bps bid, 260 bps offered.

The strength continues to bring out more buyers, he said, rather than the expected sellers.

In Pakistan, the United States promised another $110 million in foreign aid to support the government as 1.5 million have been driven from their homes, according to the United Nations.

The United Nations has asked the international community to contribute to the care of the refugees displaced by ongoing fighting between Taliban extremists and the Pakistani military.

The Pakistani bonds due 2017 added 1 point to 59 bid, 63 offered.

In the Philippines, the government's deficit hit PHP 111.8 billion for the year through the end of April, according to data released by the Treasury Department.

A surplus of PHP 7.9 billion helped ease the trend, but revenues fell short at PHP 351.9 billion.

The Philippine government bonds due 2030 tacked on 2 points to 124 bid, 124½ offered.

Elsewhere in the category, Indonesia's bonds due 2019 jumped by 3 points to 125 bid, 126 offered.

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