Emerging markets stabilize somewhat from Asian panic-wides; YPF to sell $150 million notes locally

By Paul A. Harris

St. Louis, Oct. 8 - Volatility continued in the emerging markets on Wednesday, sources said.

On a return basis the EMBI-plus index was down 2.87% near the New York close, trading at a 515 basis points spread to Treasuries, 12 bps wider on the day.

In wild volatility, Latin American currencies depreciated dramatically relative to the dollar.

Meanwhile central bankers in the United Kingdom got it right, with respect to providing bank capitalization for the next three-to-six months, according to a trader who focuses on Asian fixed income. This source, who spoke on the telephone from New York shortly after the Wednesday close, believed that stabilizing Asian spreads seemed to reflect that perception.

And Argentina's YPF SA is expected to sell a $150 million offering of 10-year notes into the local market.

From both sides

"The emerging markets have been getting trashed," said Enrique Alvarez, head of Latin American debt strategy for the financial research firm IDEAglobal, who spoke mid-afternoon New York time.

Extended liquidations, coming from both dedicated money and fast money in the United States, are to blame, the strategist added, noting that domestic pension funds and others that have been long-time holders for a while are now jumping out.

Alvarez said that the benchmarks have sold off extremely.

For example, he said, Brazil's 8¼% global bonds due 2034, a benchmark which sits on the long end of the Brazil curve, was trading at 102¼ bid, 103¼ offered.

A month and a half ago the paper had been holding price levels of 120 and 118, he added.

"That bond has now broken through the lows that it had previously established during the credit market crisis last July," Alvarez added, noting that those lows were in the context of 108.

"So right now we're significantly below last year's panic lows."

In the intermediate section of the Brazilian curve, the 6% global bonds due 2017 were seen Wednesday at a 441 bps spread to Treasuries by an emerging markets syndicate official who reflected that the all-time tight for that paper was 114 bps.

"Everything is widening out," the source allowed.

"Issuers on the caliber of the World Bank are issuing at 75 bps over Treasuries for three years.

"But there is no doubt that the high quality emerging markets sovereigns have widened out much more than the U.S. high-grade market."

Both the syndicate official and IDEAglobal's Alvarez remarked upon the dire lack of liquidity in the market.

Wild volatility in currencies

The syndicate official saw wild volatility in Latin American currencies on Wednesday.

The Mexican peso was at 12.17 to the dollar just after New York close, the source said, and added that it closed Tuesday at 12.31.

"It has been up over 14.00 today, and it has moved from 13.00 to 14.00 in the space of five minutes," the syndicate official added.

"We're talking about a currency that was one of the most stable currencies in the world for a long time. Back in mid-September it was around 10.70 or 10.80.

"These are just huge moves."

From Europe

The lack of liquidity was also noted by a trader who focuses on Russian corporates, speaking by telephone from London late in the New York morning.

Russian corporates were moving in line with the rest of emerging markets, the source said.

Gazprom five-year CDS were at 510 bps bid, 540 bps offered.

"Yesterday it was around 490 bid, 500 offered.

"It traded Wednesday as high as 540 before it tightened a little following the rate cuts around the globe.

"It held that tightening a little while. But we have almost given back all of the tightening," the trader said.

"It doesn't really have to do with Gazprom per se, but with the balance sheets of so many of the players in this market."

Confusion and lack of liquidity were the forces driving the emerging markets in Europe on Wednesday, the source said.

"Some of the sellers are forced sellers. But many are watching from the sidelines, and don't want to sell at these low levels."

A possible solution

A trader who focuses on Asian fixed income also commented on the lack of liquidity.

However, the source said, steps taken by central bankers in the United Kingdom, making money available to banks for short-term financing in exchange for those banks issuing preferred shares to the government, seemed to be boosting confidence.

"You see that reflected in CDS spreads today," the trader said.

"We're off the panic-wides in Asia. There has been better two-way flow in CDS in the Asian afternoon, as well as in the New York session.

"That being said, the cash markets are incredibly difficult. There are liquidations left, right and center, reflecting the difficulty in finding assets, and the expectation that there are going to be some very serious redemptions in hedge funds and real money accounts."

This source spotted the Republic of Philippines 10 5/8% global bonds due 2025 at 119 offered, shortly after the New York close, and added that on Tuesday they were at 126 bid.

"That's a 7 bps swing from bid to offer in the course of just over 24 hours," the trader said.

"It reflects that any higher dollar-price, certainly in an over-par bond, is going to be very ripe for profit taking by the accounts, because it is useful for raising cash."

YPF plans $150 million

Argentina's YPF plans to sell $150 million of 10-year senior unsecured notes (BB+) into the local market in a sale being driven by demand from Argentine pension funds, according to a market source.

"In Argentina the pension funds have to have a certain amount of their portfolios in non-government debt," the source explained.

Adding that YPF is majority-owned by Spain's Repsol YPF, the source remarked that it is one of the best credits in Argentina.

"They're going to manage to get a dollar-denominated deal done at levels that would look absolutely unbelievable to the rest of us," said the source, speaking Wednesday afternoon.

"It's because it's a great company and the pension funds are stuck. They have to buy something."

BNP Paribas is the bookrunner, the source said.

Timing on the deal remains to be determined, the source said, but added that the deal is not likely to price in the very near future.

Proceeds will be used to fund the company's capital expenditures program.

The prospective issuer is a Buenos Aires-based energy company.

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