EM investors knee-deep in supply, stay on sidelines; sovereigns quiet; Kuo, JBS price

By Christine Van Dusen

Atlanta, Sept. 10 - Emerging market trading was light and the flow of new bonds slowed on Friday as investors - increasingly comfortable with risk but still sticking to the sidelines - turned their attention to sorting through the existing level of supply.

Yields on 10-year Treasuries climbed again, as much as 4 basis points by mid-morning, and 30-year Treasury yields were up about 3 bps and touched levels not seen in almost a month.

But even with risk appetite on the rise, it was still "a very dull day, actually," a London-based trader said. "The focus and activity and new deals have come largely from Asia and Latin America. Clients are focusing on those, and that seems to be taking everyone's time."

Kuo, JBS Finance print notes

Even so, a smattering of new issues did come to market on Friday.

Mexico-based industrial conglomerate Grupo Kuo SAB de CV priced a $50 million add-on to its existing $200 million 9¾% bonds due 2017 at 106.5, a market source said.

Proceeds from the Rule 144A and Regulation S transaction will be used to pay a syndicated loan, according to a company announcement.

And JBS Finance II Ltd., a Cayman Islands subsidiary of the Brazil-based beef processing company, priced a downsized $200 million add-on to its existing $700 million 8¼% notes due 2018 at 102.051 to yield 7 7/8%, according to a market source.

JPMorgan and Santander were the bookrunners for the deal, which was originally sized at $300 million. Proceeds will be used for debt refinancing and for general corporate purposes.

The original notes priced in July at 99.634 to yield 8½%, or Treasuries plus 614.2 bps, in a Rule 144A and Regulation S transaction.

This followed the Thursday pricing of the Philippines' PHP 44.11 billion 4.95% global bonds due Jan. 15, 2021 at 99.607 to yield 5% with Citigroup, Deutsche Bank, Goldman Sachs, HSBC, Credit Suisse and JPMorgan. The Securities and Exchange Commission-registered deal came in at the rich end of talk.

And Montenegro priced €200 million 7 7/8% bonds due Sept. 14, 2015 at 99.501 to yield 8% via Credit Suisse and Deutsche Bank in a Regulation S-only deal. The issue was whispered with a yield in the low 8% area and was oversubscribed three times, a source said.

Sovereigns step aside

Most of the sovereign world, however, stayed out of the primary market on Friday.

"We had some action on the part of ratings agencies, with Colombia getting a better outlook to positive and Costa Rica becoming investment grade," Alvarez said. "But the timing is not right [for new deals]."

Sovereign issuers, particularly in Latin America, are feeling "a little bit of jitters about spreads in Europe, so the timing hasn't been right to launch anything," he said.

It's a different story for corporate issuers, though. Market-watchers were whispering about the possibility of deals from Brazil: Votorantim Participacoes SA and Companhia Siderurgica Nacional SA (CSN).

Corporate issuers have felt more comfortable coming to market because "they are paying more attention to the overall environment for yield," Alvarez said. "On the sovereign side the timing is more critical. And again, in relative terms, we're still at very low yield levels, so they're not really pressed to push something out the door."

They're waiting to "measure the temperature of the water," a source said.

Deal flow isn't likely to pick up for these issuers for a little while yet, Alvarez said. "I would probably say that it will take some more time," he said. "We're starting to get to the mid-point of September, and they'd start thinking about necessities and financing for 2011 soon. But I don't think there's a rush."

Secondary quiet

In the secondary market it was quiet on Friday, said a London-based trader. "The only different thing is that we're seeing stocks stronger and Treasuries weaker, which usually means EM bonds would be stronger and tighter," he said. "But it's not really happening. I'm not sure if it's just too quiet. We're not doing anything."

He was expecting to see "a little bit of buying going on, with the dynamics of the wider markets," he said. "So whether it's the start of change in those tacticals or just Friday malaise, we don't know yet. But it's been very quiet this week, given that it's September."

Friday didn't see a lot of standouts, said Enrique Alvarez, debt strategist with think tank IDEAglobal. "The market seems soft and has been soft most of the week. It's been soft because of the backup in U.S. yields, and that's obviously making sovereign debt holders have to take note and adjust dollar prices to the new levels in U.S. long yields."

Argentina and Venezuela were driven lower during the week, he said. "Both are high-betas, and especially Argentina was at the top of the crowd on the way up for the market and now it's getting battered as the U.S. Treasury rate is becoming unstable."

The Argentina 2033 bond, for example, was at 80¼ bid as of last Friday and closed out this week closer to 77 5/8.

Inflows slow

The trader hopes that activity will pick up in the Sept. 13 week.

"I would expect so, but it's driven largely by the new issuance pipeline; that's still what people will be focusing on," he said. "To what degree that impacts the secondary and making room for the new issues, I don't know."

And it remains to be seen where inflows will stand in the coming week.

Inflows were "the slowest since early June" for the week ended Sept. 8, according to data tracker EPFR Global. "Flows decisively favored the dedicated Emerging Market Local Currency Bond Funds sub-group. Overall flows into the EM local currency funds fell to a 14-week low."

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