Philippines issues notes amid better risk sentiment; post-holiday liquidity limited

By Christine Van Dusen

Atlanta, Oct. 11 - The Republic of the Philippines sold notes on a Tuesday marked by increased investor confidence and better buying of emerging markets bonds on the back of soothing news from the European Central Bank.

"Rational or not, all you need to know is that European retail investors have decided en masse that EM is cheap right now and are putting money to work across the board," a trader said. "Most of this demand is directed at Russian names."

He also noted some interest in names like City of Kiev and South Africa's Eskom Holdings.

"For now, be happy to accept the optimism surrounding all the bailouts, with China further recapitalizing its biggest banks, Russia talking about buying euro debt and everyone on tenterhooks for the pending new mega-package for European banks," a London-based trader said. "It seems to be enough, with risk assets everywhere catching a huge bid."

The Markit iTraxx SovX spread opened Tuesday at 315 basis points - about 15 bps off from pre-sell-off levels seen in mid-September - and later widened to 321 bps.

"But in cash bonds the price action has been stronger, with very few retracements," a trader said. "Even BTA Bank's 2018s are 44 bid now."

There were at least two reasons for Tuesday's more optimistic tone, according to a report from Barclays Capital Markets.

"The European Central Bank's non-standard policy measures to soothe banks' funding pressures on Thursday reduce the tail risk of systemic bank failures," the report said. "The press conference following Sunday's Franco-German summit revealed that they are working on a joint plan to solve the crisis."

The plan is expected to be long lasting and recapitalize the banks while finding a long-term solution for Greece's issues, assuming the sovereign stays in the euro zone, Barclays said.

"Emerging markets have traded more constructively over the past few days, assisted by expectations that a comprehensive plan for euro area banks might be forming, with implications for an eventual end to contagion pressures from the euro area," the report said.

Philippines prices bonds

Even with the day's improved risk sentiment, the primary market remained mostly hushed, with just the Philippines pricing a $50 million tap of its 6 3/8% notes due Oct. 23, 2034.

The notes came to the market at 117.5 to yield 5.077%, or Treasuries plus 203.6 bps, via Citigroup, Goldman Sachs, HSBC, JPMorgan, Standard Chartered and UBS in a Securities and Exchange Commission-registered deal.

The notes will be consolidated with the existing $1 billion 6 3/8% notes due 2034 issued on Oct. 23, 2009; $850 million issued Jan. 13, 2010; and $946.8 million issued Oct. 6, 2010.

"To issue or not to issue? That is the question," a trader said. "Only then will we discover if this amazing recovery is for real."

Liquidity was limited as the market attempted to make up for Monday's holiday.

"Volumes are below average, however, spreads are still performing as the rate market backs up," another trader said. "It still doesn't feel like many have much conviction here, and it's very thin in the marketplace, outside of the more liquid benchmarks. The real test will come from supply. This is where the market plays its hand. And I sense a few names are keeping a watchful eye on secondary performances."

Further market stability and spread performance will likely trigger more supply, he said.

Ukraine misses bounce

In trading on Tuesday, market sources saw fairly widespread buying during the morning.

"It's generally still a feeding frenzy, away from Ukraine," a trader said.

Coloring that picture was the news that former prime minister Yulia Tymoshenko was sentenced to seven years in prison for abuse of office.

"While not selling off, Ukraine is not participating in the bounce. Sovereigns are lower as a reaction to Tymoshenko's seven-year sentence. Interestingly we haven't seen much weakness in the quasi-sovereigns or corporates yet," he said.

By the European afternoon, most of the weakness was focused on the sovereign space.

"Corporates are supported by retail demand," he said.

Russia sees demand

Looking to Russia, massive demand was seen for quasi-sovereign names.

"Do not mess with this sector right now," the trader said.

And Russian corporates were active. "The magnitude of the moves in both directions is simply amazing," he said.

Turkey's sovereign bonds were quiet on Tuesday morning.

"Retail investors are loving the corporates," a trader said. "We've only been asked to offer bonds since the morning, and the interest was mainly on Akbank papers, Yuksel Insaat and Yasar Holdings."

From Africa, most names were firmer on Tuesday.

"But they're not running away," a trader said. "I still think there's some dealer inventory to clear in this sector."

Sukuks remain popular

By the afternoon on Tuesday, some two-way activity was seen for Middle Eastern sukuk notes.

Sukuks, overall, remain in favor, a trader said.

"What is apparent is that every issuer must surely be being pitched the strengths and benefits of the sukuk market," he said. "Granted, it's firm. But not everything will sell like hotcakes. And the pricing, rating and story all have to be in alignment."

The day also saw some nibbles for Kuwait-based Kipco, as well as some demand for Emirates and Emaar Properties, he said.

"The bonds are now 100 bps tighter on the week," a trader said. "We're still seeing support for Jordan, which is 75 bps tighter on the week, and sellers for Sabic Capital's 2015s and two-way for Dubai Water and Electricity Authority's 2015s."

He also noted some interest in Dubai Holdings' 2012s and 2014s, along with DEWA's 2020s.

"One still has to move out on the DEWA and Dubai curve from the 2015 and 2016 paper into the 2020s, in my view," he said.

Lebanon stayed steady. "Although it does feel like there's some paper for sale," he said. "On both a cash price and spread basis it looks fully priced to me."

LatAm grinds higher

From Latin America, bids were a bit better on Tuesday and offers considerably higher as some recent sellers sought to avoid getting burned, a New York-based trader said.

"Latin American credit continued to grind higher," he said. "Look for Street bid and offers to tighten on low-beta names."

Hypermarcas' 2021s continued to climb, printing at 901/2, up from 84 to 86 a week ago.

"Latin American credit markets are firmer for sure, but it's tough to think that investor conviction overall equals recent market performance," he said. "The present buying tone looks like it's being done with caution."

Bonds from the meat industry climbed, including those from Marfrig Alimentos and JBS-Friboi, he said.

And market-watchers were keeping an eye on Venezuela, which was said to be considering an issue of $3 billion bonds due 2026.

Buying continues from Monday

All of this activity followed Monday's "huge buying" on what has typically been a quiet U.S. holiday, he said. "It may have been a U.S. holiday, which means no broker markets, but in the absence of any more bad news over the weekend the direct buying continued."

Dubai, Vimpelcom, Gazprom, International Petroleum Investment Co. and Qtel International were all up a half-point on Monday, he said.

"I guess we keep tightening until we find an issuer happy to consider the new spread paradigm," he said.

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