Emerging markets outperform Treasuries on better volume; Philippines reopens, Russia's Evraz prices

By Reshmi Basu and Paul A. Harris

New York, July 27 - Spreads on emerging market paper tightened Wednesday as several issuers brought new deals - although prices ended lower given the big drop in the U.S. Treasury market.

More volume was seen Tuesday compared to Monday's quiet trading, according to a trader.

"Spreads are tightening," he said in the late afternoon. "There's buying on the dip. The markets are gaining with equities," he added.

The Bovespa performed well, taking its cue from the U.S. stock market. In Brazil, stocks ended 1.97% higher at 21,737 points at the São Paulo Stock Exchange.

In debt, the JP Morgan EMBI+ index tightened six basis points to 469 basis points.

Meanwhile, the primary market saw plenty of new issuance Tuesday. The Philippines retapped and existing issue, Evraz priced a new deal and Kyivstar exchanged old bonds for new and added in some extra new bonds as well.

The Republic of Philippines reopened its 9 1/8% bonds due 2010 (Ba2/BB/BB), pricing an additional €300 million at 103.25 to yield 8.349%. With the price at that premium, the yield was reduced significantly from the original level.

The deal was the second retap by the government since the re-election of President Gloria Macapagal-Arroyo.

On June 29, the Philippines added $250 million to its 9 3/8% bonds due 2017.

"The Philippines has high external borrowing requirements, so whenever the market is open to new Philippines issuance we should expect them to rush a deal like this one into the market," said an emerging market analyst.

"They have their own fiscal deficit to finance, plus they need to cover the financing requirements of Napocor, their state-owned power company.

"So long as the market is willing to buy new Philippines paper, they'll be more than willing to sell it."

Deutsche Bank Securities and Credit Suisse First Boston ran the books on Tuesday's deal.

Also in the primary, Russia's EvrazSecurities SA priced $150 million of guaranteed notes due 2009 (B3/B) at par to yield 10 7/8%.

The deal, downsized from $200 million, came directly in line with price talk of 10 7/8%.

Credit Suisse First Boston and ING ran the books for the Regulation S deal for the Russian steel company.

And out of the Ukraine, Kyivstar GSM (B2/B) priced $265 million of five-year notes at par to yield 10 3/8%.

Part of the new issue was an exchange for its existing 12¾% bonds due 2005, while $135 million was new bonds.

Citigroup and Dresdner Kleinwort Wasserstein ran the books for the mobile-phone network operator.

"Kyivstar came out nicely [unlike Gazprom from last week and the Evraz deal], finished up a point and change," said a second trader.

In the pipeline, The Republic of Uruguay set guidance for its devaluation-protected notes due 2006 (B3/B-) to yield in the area of 17¾%.

With a size equivalent to $250 million, the Uruguay peso-denominated DPN notes are expected to price Wednesday morning.

The transaction is part of a two-tranche bond offering, which consists of Unidades Indexadas (UI) bonds due August 2007 and the devaluation-protected notes (DPN) due February 2006.

ABN Amro and Citigroup are joint bookrunners on the deal.

Tuesday's "curious" session

Brazil stood out as a relatively strong performer Tuesday, outperforming both emerging markets overall and U.S. Treasuries.

At late morning, Brazil's bond due 2040 was at 95.3 bid, by 3 p.m. ET it was at 94.9 bid but it then rallied to end down a quarter of a point at 95¼ bid.

"That comes to me as quite curious," said Enrique Alvarez, Latin America debt strategist for think tank IDEAglobal.

"Normally in a situation like this you would see Brazil underperform," said Alvarez.

"Basically, Brazil would go hand and hand with Mexico and Chile - the investment grades that react immediately to what happens with the 10-year [Treasury].

"Brazil was down, and then it pushed. It's still down for the day, but it's not looking as bad.

But he said it was hard to tell whether there was real support for Brazil, given that the last few days have been characterized by a "fast money/carry environment."

Brazil's component of the JP Morgan EMBI+ Index tightened 13 basis points to 613 basis points during Tuesday's session.

Latin America generally traded in the same pattern as Brazil, Alvarez added.

And all were moving throughout the session in response to the U.S. government market.

"Prices stagnated and waited for the next Treasury bounce or change in movement," Alvarez said.

Also Tuesday, Russian paper was down. The Russian bond due 2030 lost 1.375 to close at 90½ bid.

Its component of the EMBI Index tightened three basis points to 319 basis points.

The second trader noted there is still a lot of uncertainty about Yukos.

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