Emerging market debt wider on rollercoaster ride; Gazprom sells globals; EM sees $57 million inflows

By Reshmi Basu and Paul Deckelman

New York, March 1 - Emerging market debt saw a choppy trading session Thursday amid increased anxiety over the unwinding of the carry trade, coupled with a volatile U.S. equity market.

In the primary arena, Russian state-controlled gas monopoly OJSC Gazprom, issuing via Gaz Capital SA, priced a dual tranche offering of €500 million in 10-year global notes and $1.3 billion in 15-year global notes (A3/BBB/BBB-).

The tranche of 10-year notes priced at par to yield 125 basis points more than mid-swaps. That came at the tight end of guidance, which was set for a spread of mid-swaps plus 125 to 130 basis points.

Meanwhile the $1.3 billion tranche of 15-year notes priced at par to yield 195 basis points over Treasuries. That came in line with talk, which was set in the area for a spread of Treasuries plus 195 basis points.

Credit Suisse and Morgan Stanley were joint bookrunners for the Rule 144A and Regulation S transaction.

Proceeds from the sale will be used for corporate purposes.

Also tapping the capital markets, Merrill Lynch & Co., Inc. priced a R$637.8 million - $300 million equivalent - offering of 10-year senior unsecured notes (Aa3/A/A-) at par to yield 10.71%.

The deal bears a coupon of 10.71%, which is payable in U.S. dollars at the Brazilian/U.S. dollar exchange rate.

Merrill Lynch was the bookrunner for the Securities and Exchange Commission-registered offering of global notes.

EM sees $57 million influx

In other news, emerging market debt saw muted inflows for the week ending Feb. 28, reported EmergingPortfolio.com Fund Research.

Dedicated funds saw $57.3 million enter the category, a sharp decline from last week's gain of $218 million. Nonetheless, the asset class has not recorded any outflows on a weekly basis for the year. Year-to-date, funds flowing into the asset class stand at $2.737 billion.

Rollercoaster ride for EM

Emerging market debt seesawed Thursday amid a volatile trading session, triggered by nervousness surrounding the potential unwinding of the carry trade.

At the close of the Asian trading day, Asian credits were firmer by 2 basis points, keeping in line with Wednesday's recovery recorded in the New York session on the back of sanguine comments made Federal Reserve chief Ben Bernanke.

As in previous sessions, the swing in sentiment was echoed through the credit default swaps market, according to a market source. Investors were seen purchasing credit protection while the Street traded in cash.

As the New York session rolled around, emerging market debt declined in the morning, taking its cue from softer U.S. stock markets. Also adding more anxiety to an already skittish market, Japan's financial minister Hiroshi Watanabe warned about carry-trade risks, noting that authorities were eyeing the impact from any potential unwinding of such trades.

However, by mid-afternoon the asset class had retraced some losses as U.S. stocks rebounded on the back of upbeat manufacturing data. At session's close, the Dow Jones Industrial Average was lower by 34.29 points, after having plunged as much as 209 points earlier in trading. For the day, spreads for emerging markets widened by 2 basis points versus U.S. Treasuries.

Among benchmark sovereign names, the bellwether Brazilian bond due 2040 eased 0.10 to 133.45 bid, 133.50 offered. The Russian bond due 2030 gave up 0.06 to 113.25 bid, 113.375 offered. And the Turkish bond due 2030 shed 0.13 to 152.375 bid, 152.875 offered.

Asia wider in New York

A New York-based trader in Asian paper said that "on the day, we were about 5 [basis points] wider in Philippines and Indonesia - which is exactly where we were when we opened up in the morning, but the market was incredibly volatile."

He said there was a firm tone "for just the first few minutes of the session - but once the equity futures started going lower, spreads widened massively, I would say."

From opening levels about 125 to 127 basis points above comparable U.S. Treasury issues, spreads ballooned "up into the mid-130s, but as soon as the 10 a.m. [ET] numbers were released and [U.S.] equities rebounded sharply, our market came roaring back."

That followed the mid-morning [ET] announcement from the Institute for Supply Management that its index of February manufacturing activity came in at 52.3 - up solidly from 49.3 in January, and well above the 50.0 reading analysts had generally expected.

A reading at 50 or above indicates expansion, while anything below 50 signals contraction. Concern that manufacturing was lagging, pulled down by sagging auto production and a downturn in housing, has recently been weighing on investors' thoughts.

The trader said that brought the spreads back down, with the Philippine five-year "in the mid 120s, to close right where we opened, but things were pretty volatile on the day."

The five-year Philippine CDS closed at 127-130 bps, while Indonesia ended at 124-127 bps.

The trader said that high-grade issues "were pretty quiet." He said he had seen little movement in such credits as Hutchison Whampoa, ICICI Bank, Malaysia, Korea or any of the other high-grade benchmarks.

It was the same story among the high-yield corporate names, which he said were "decently offered overnight, and certainly traded wider, but the amount of activity in high yield corps. certainly was small relative to the amount of activity in sovereigns."

That same widening, then tightening pattern was also seen in Latin American debt trading, with Ecuador's bonds seen having widened out by as much as 17 basis points in the early going - but then having recovered at least half of that by the afternoon in the United States.

Latin America corporates drifting

On the Latin American corporate side, investors were not completely buying into Wednesday's bounce-back story.

On Thursday, buying was tentative while prices drifting downward, according to a market source.

Nonetheless, there has not been any aggressive selling, although more aggressive offers are slowly trickling in.

Among Brazilian corporate names, petrochemical company Braskem's 11¾% bonds due 2014 were spotted down 0.17 to 127.70 bid, 128.83 offered. Mining giant Companhia Vale do Rio Doce's 8¼% bonds due 2034 eased 0.85 to 121.78 bid, 122.53 offered. And paper producer Votorantim's 7 7/8% bonds due 2014 gave up 0.44 to 113 bid, 114.81 offered.

Seesaw week for EM

For the week, the market has witnessed topsy-turvy trading. On Tuesday, the market sold off as sharp decline in China's stock market triggered an unwinding of positions across global financial markets.

The market recovered somewhat Wednesday, but was still in a fragile state.

"In light from what has been going on since Tuesday to Thursday, the market has been relatively resilient," remarked Enrique Alvarez, Latin America debt strategist for think tank IDEAglobal.

"It's given up a little bit of space, but nothing major," he said, adding that the recent sell-off has been healthy because the market was in need of a bout of profit-taking.

Nonetheless, the selling pressure has failed to create any points of entry as spreads are still hovering around tight levels.

"People have liquidated very little," observed Alvarez.

"In general, they are still very long in this category. I don't think they are going to be spooked that easily and that's the bottom line."

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