Cautious optimism returns to emerging markets on China news; bonds come off recent lows

By Christine Van Dusen

Atlanta, June 9 - The picture for emerging market debt improved somewhat on Wednesday as the European economic downturn took a backseat to news that China's exports grew by half, inspiring a touch of optimism for investors and issuers who are hoping to see an extended period of stability that could awaken the sleeping primary.

But confidence was kept in check by the Federal Reserve's Beige Book report, which tempered the good news of increased consumer spending with mention of continuing concerns about the European debt crisis and BP plc's gigantic oil leak.

Yields on 10-year Treasuries ticked up about 2 basis points to 3.2% by late afternoon but settled unchanged at 3.19% by day's end, a market source said.

So the tone was "a bit jittery" but generally "OK," a London-based trader said. "The euro is stabilizing. Governments are off and equities are up."

Market needs traction

The somewhat better tone overall was part of an "encouraging" trend, a New York-based market source said. "But what we still need to see is the market developing more traction as well as some price recovery in recent issues."

He expects that the rest of this week and the beginning of next week will remain relatively quiet.

"But if we see the market behaving as it has been, and see that continuing, we could find ourselves back in a market where investors are willing to re-engage and look at new issues," he said.

The London-based trader agreed. "A few more days like this and the window might be open for new issues."

And if that window opens, there's likely to be a strong rush of deals coming through.

Included on the waiting list is Russia-based Mobile Telesystems' planned 10-year eurobond issue via Bank of America Merrill Lynch, Credit Suisse and RBS; Saudi Arabia-based Sabic Capital's planned five-year senior unsecured notes with JPMorgan, HSBC and RBS; and Indonesia-based Indosat's planned dollar-denominated fixed-rate senior notes due 2020 via Citi, DBS Bank Ltd., Deutsche Bank, HSBC and RBS.

Another possible issuer this year, market sources said, is Peru.

But the first EM issuers that are likely to come to market are those with "high name recognition, with public equity outstanding and existing secondary bonds," the New York market source said. "The market is open for investment-grade issuers. Others, with lesser known names and lower quality, will have to wait a little bit."

What might get in the way of any kind of immediate progress, though, is the upcoming FIFA World Cup, which kicks off on Friday. "Especially in Europe and Latin America, all kinds of investors will want to avoid bigger positioning in order to be more relaxed while watching the games," a Europe-based trader said.

So it may take "a while longer" before the primary truly perks up, a New York-based trader said. "We need to see some clarity in the broader markets."

Primary quiet, trading choppy

For now, there's nothing in the way of new deals. "The primary is still dead," the London-based trader said.

Said the European trader: "There are still no new issues because the market is too nervous. If new issues come, then they must price cheap to existing bonds, which again will put pressure on the secondary market."

In the secondary, trading was "choppy," according to a New York-based trader. "We saw some weakness. But overall today was really quiet. It was nothing much."

Sovereign bonds out of Indonesia and the Philippines were both about 1/8 of a point lower as the New York close neared, he said. "Things still feel pretty well bid, but who knows. We'll have to see what happens."

Overall, bonds were "off the recent lows," the New York-based market source said. "That's encouraging the stability we've seen over the last couple of days. There's been some small price appreciation."

The European trader saw a similar trend. "I can't really tell you what's going on in the markets because I don't have any flow to manage, and therefore don't know how the real prices are. But the feeling is that we are a touch stronger on most paper."

The lows seen in the last few weeks aren't likely to be exceeded, he said. "We won't touch it again during the next few weeks."

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