Emerging markets looking brighter; prices up, spreads narrow; primary sees $2.25 billion price

By Aaron Hochman-Zimmerman

New York, Oct. 25 - Emerging markets trading turned in a strong performance along with another day of primary production in the billions.

The day's session was calmer than in recent days, but issues were able to hold on to the gains they made.

"Spreads are much tighter," said Erich Bauer-Rowe, head of emerging markets for Jefferies & Co.

"Going into month's end, I tend to believe we will move to higher prices and tighter spreads," he added.

Consistently erratic Argentina posted strong gains to lead the pack of high betas. The discount notes due 2033 jumped up 1.80 for the day.

With the stronger prices and hopes for an up to 50 basis points rate cut from the Federal Reserve expected on Oct. 31, optimism is trending upwards as well.

"It's pretty amazing how good a day we had," a portfolio manager said, considering the unimpressive day in U.S. equities.

Although he expects a cut to help the market, a reduction by as much as 50 bps would be "a positive surprise," he said.

In the primary, $2.25 billion priced as the flow continued through the pipeline.

Leading were two tranches totaling $2 billion from Russia's JSC VTB Bank.

"We continue to be subject to the events that are taking place in the equity market," Bauer-Rowe said, but emerging markets have held their own.

"It's been quiet, but the market held up well today again, amidst a soft backdrop," said a trader who specializes in Asian credits.

Market volatility found its way higher, despite all of the positive feelings around emerging markets. The VIX index gained 0.37 to close at 21.17 for the session. The index is the generally accepted yardstick of market volatility.

As a sector, emerging markets tightened by 7 bps to close at 202 bps, according to JP Morgan's EMBI+ index. The EMBI+ measures the amount of yield investors demand to keep money in emerging markets debt.

Primary prices another $2.25 billion

VTB Bank priced a $1.2 billion five-year fixed-rate note (Baa2//BBB+) at Treasuries plus 262 bps and an $800 million two-year floating-rate note at Libor plus 170 bps.

Both issues priced at par.

Deutsche Bank and JP Morgan acted as bookrunners for the deal.

VTB is a Moscow-based retail and commercial bank.

South Korea's Pusan Bank priced $250 million of 10-year subordinated lower tier II notes (A3//BBB) at 99.796 with a coupon of 6% for a yield of 6.048% and a spread of mid-swaps plus 140 bps.

Citigroup, Korea Development Bank and UBS brought the deal to market.

The bonds feature five years of call protection and a step up of 100 bps plus the initial Treasury spread plus the prevailing five-year Treasury rate.

Pusan Bank is a South Korea-based retail and commercial bank.

"It actually looked cheap," a trader said.

"But the fact that it had to come so cheap to get done isn't that encouraging," he said, adding that he had not seen the deal trading, but may when Asian markets open on Friday.

Benchmark coming from Kazakhstan

JSC Development Bank of Kazakhstan announced plans to offer a benchmark-sized dollar-denominated 10-year bond (A2/BBB-/BBB).

Deutsche Bank and JP Morgan will act as bookrunners for the deal.

A roadshow for the offer will be held in Europe and the United States during the week of Oct. 29.

Development Bank of Kazakhstan is a government-controlled, Astana-based bank.

Meanwhile Brazil's BR Malls Participacoes SA has asked Citigroup and UBS to manage a dollar-denominated senior unsecured perpetual bond offering.

A roadshow will be held from Oct. 29 to Nov. 1; pricing is expected to follow.

The deal will come with five years of call protection.

BR Malls is a Rio de Janeiro-based owner and operator of shopping malls.

The deal "should go well," a syndicate official said.

Calm Europe holds gains

Emerging Europe, which has been calmer than the other sectors, but still taking its cues from U.S equities, saw some mild tightening.

Turkey held talks Thursday with the representatives of the Iraqi government in what Turkish officials said may be the last chance to prevent a ground offensive against the Kurdistan Workers Party (PKK) which has conducted raids into Turkey from its bases in northern Iraq.

The United States has urged Turkey to use restraint, but while in Romania on Thursday, prime minister Tayyip Erdogan said that decisions regarding the use of the Turkish army will be made in Ankara not in the United States.

Although much of the political world is on edge over Turkey's actions, the market has failed to condemn Turkey's sovereign issues.

The government bonds due 2030 were spotted up 0.80, trading at 157.431 bid, 157.681 offered.

In Russia, where democracy is rarely advancing, the Kremlin has begun a campaign to hinder the efforts of election observers in the former Soviet republics, according to a report in the New York Times. If the Kremlin is successful the Vienna-based Office for Democratic Institutions and Human Rights will suffer severe cuts in its staff and would be barred from reporting on elections until approximately one week after official results are announced by the victors.

Also, Russia's natural resources minister Yuri Trutnev, announced Russia's intent to file an official claim to the Arctic Ocean's Lomonosov Ridge and the approximate five billion tons of fuel it holds.

No objections were immediately voiced by the international community, according to the Itar-Tass News Agency.

Russia's sovereigns due 2030 fell 0.10 to trade at 113.033 bid, 113.158 offered.

LatAm optimistic, gaining ground

Latin America picked up some steam as yields narrowed across most of the high-beta credits.

"The high-beta products performed well," Bauer-Rowe said.

"There hasn't been any earth-shattering news," he said.

Still, there have been rumblings about Venezuela's president Hugo Chavez furthering his agenda by extending his term beyond its current limits and give him greater control over the country's central bank and oil assets, he said.

"That will be a negative event," Bauer-Rowe said.

Rising oil prices will favor oil producing nations like Venezuela.

"Commodities are on the rise and all that is going to add fuel to better markets," he said.

The price of light sweet crude jumped to over $90 per barrel.

Venezuela's 9.25% bonds due 2027 managed to add 0.50 to trade at 107 bid, 107.5 offered.

Brazil's 20-year CDS tightened in around 10 bps, but the country's benchmark bonds fell by 0.05 to trade around 114.75 bid, 115.25 offered.

In Argentina, market watchers are keeping eyes on Sunday's elections, although senator and first lady Cristina Fernandez de Kirchner is a heavy favorite to win, and she is expected to generally leave economic policy in its current state.

The strong performer of the day tacked on 1.80 to its high-beta 8.28% sovereigns due 2033. The issue was quoted at 96 bid, 96.5 offered.

Asia 'held up well'

Asian credits moved forward even as equities in the United States were back on their heels.

"The pockets of the market which have got very very good technicals have held up," a trader said.

Asia also brought the only new deal of the day from Pusan Bank, but the next few days expect to see less action, the trader said.

"Things are going to quiet down ahead of the Fed meeting," he said.

After the anticipated rate cut, emerging markets investors will wait to see how other market sectors react.

In Thursday's trading the Philippines benchmark issue due 2033 picked up 0.35 and was quoted at 133.75 bid, 114.25 offered.

Indonesia's sovereign due 2017 seemingly called in sick, again, as it traded at 105.5 bid, 106 offered for the third day in a row.

Pakistan managed to avoid political headlines for another day and saw its volatile government bonds due 2017 added 0.5. The issues were quoted at 90.5 bid, 92.5 offered.

In corporates, South Korea's MagnaChip Semiconductor, which beat its third quarter revenue target with operational modifications, saw the benefits in its bond prices.

The company's 8% notes due 2014 jumped 2.175 to close at 75.25.

Its 6 7/8% senior secured notes due 2011 fell just 0.625 to 86.

The senior secured floating-rate notes due 2011 climbed 1.875 to end at 90.

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