EM side-steps major market's gloom; trading still lower; primary steps up production

By Aaron Hochman-Zimmerman

New York, Oct. 17 - Emerging markets was again subject to bad news, but the sector continues to show its ability to steer clear of disaster.

"We did see some selling coming in," a trader said as spreads across emerging markets were 5 to 6 basis points wider.

Although, "markets are very much well-behaved," he said.

Early gains were lost in what turned into a flat to weak session.

Venezuela still found a way to ride $87-per-barrel oil prices to the high-beta winner's circle by adding 0.50 to its benchmark sovereign.

In the primary, as if to prove that investors have not lost their appetite for risk, the pipeline produced $1.5 billion and €1.2 billion over three deals.

Powerhouse OAO Gazprom made the most noise by pricing its €1.2 billion bond.

One emerging markets analyst said that too many new deals might leave the primary "overheated" but conceded that "the core underlying demand is still there, though, so the big new issues should be able to get done."

Still the analyst was not overly optimistic about emerging markets' near-term future.

"I'm not sure how healthy the Monday/Tuesday correction was, especially because it was driven by some pretty serious concerns about the SIV sector and U.S. financials in general," he said.

Volatility, which had been up over 20.00 during the afternoon, came back down 1.48 on the day to end at 18.54, according to the VIX index, which is the accepted gauge of volatility in the market.

Emerging markets saw its yield rise to its widest level in almost two weeks. The EMBI+ added 7 bps to carry a spread of 189 bps. JPMorgan's index measures the amount of yield investors require to keep money in emerging markets.

Turkey provides intrigue, Europe lower still

European issues continued to slip farther as record oil prices only add to angst over more bad news from the U.S. housing market.

"The last couple of days were a good reminder that the problems in U.S. structured finance are not going away any time soon, and are going to make a full recovery in EM credit spreads difficult, if not impossible, over the next few months," the analyst said.

Political headlines were also in abundant supply as Turkey's parliament voted to allow the army to cross Iraq's boarder to conduct operations against Kurdish rebels.

Prime minister Recep Tayyip Erdogan mitigated the severity of the resolution by restating that the resolution's passage does not guarantee an Iraqi incursion.

Furthermore, talks with the Iraqi government were called "constructive" by one trader.

Despite the military posturing, the lira rallied on a 50 bps interest rate cut from the Turkish central bank late Tuesday night. The rate now stands at 16.75%.

The lira traded at 1.211 to the dollar.

Turkey's benchmark bonds due 2030 lost about 0.25 to trade around 156.25. The five-year CDS traded around 155 bps, "which is pretty tight considering they were over 200 in the past two months," a trader said.

In Russia, a trader saw Gazprom's new €1.2 billion bond trading up 0.25 over par.

Meanwhile, in Kazakhstan, the economy grew 10.6% to $80.4 billion last year, according to a market source.

Banks and the construction industry have recently suffered setbacks in part due to a lack of liquidity stemming from the U.S. subprime crisis. Recent U.S. housing developments may not look good for Kazakhstan, but "investors are looking to buy fixed income," especially in the emerging markets, the trader said.

LatAm trading off, but stable

Latin America was busier in the primary, but trading held on despite softness from outside the sector.

Gerdau SA priced $1 billion and Pemex issued talk for a total of $2 billion.

Despite CDS spreads generally wider, oil producer Venezuela led the high-beta credits on rising oil prices, which has been attributed to Turkey's saber-rattling.

The 9.25% Venezuelan sovereigns due 2027 were quoted up 0.50 to trade around 108.50 bid, 109.00 offered.

Brazil's 11% sovereigns due 2040 were seen trading down 0.50 at 133.10 bid, 133.2 offered.

Brazil is also attempting to reach a free trade accord between India, some African nations and the other Merco Sur members that make up most of Latin America, a syndicate official said.

"There are lots of synergies between them," the official said, particularly in terms of food production, which has been difficult for India and Africa.

Brazil's Gerdau, which priced a $1 billion 10-year bullet at 99.128, was quoted at roughly 101.00.

Argentina's typically erratic 8.28% notes due 2033 traded almost flat but picked up 0.05 and were trading at approximately 94.25 bid, 95.00 offered.

Also in Argentina, Impsa, which priced $225 million 11.25% notes on Monday at 99.011, was spotted at 98.00.

Asia widens, adds to supply

Asia was also forced to deal with the unfortunate headlines concerning the U.S. housing market, but emerging markets have not been afraid to show they are comfortably decoupling from the major markets.

As Sri Lanka priced a $500 million bond, trading widened slightly.

Political volatility or progress seemed to help the rise of Pakistan's sovereigns in recent sessions.

The Pakistani government bonds due 2017 traded at 93.5 bid, 94.00 offered ahead of the anticipated return of exiled former prime minister Benazir Bhutto on Thursday.

Elsewhere in Asia, the Philippines sovereign due 2030 was seen trading at 133.50 bid, 134.00 offered.

Primary back on top, three price

The primary sprang back to life after a series of unproductive sessions.

Three deals managed to price and Petroleos Mexicanos rolled out talk for $2 billion in new issuance.

Russia's OAO Gazprom priced a €1.2 billion 10-year bond (A3/BBB/BBB-) at par to yield 6.605%. The deal priced at mid-swaps plus 187 bps.

Citigroup and Societe Generale were the bookrunners for the deal.

Gazprom is a Moscow-based government-run oil producer.

Brazil's Gerdau SA announced the pricing of a $1 billion 10-year bullet bond (Ba2/BBB-/BBB-) at 99.128 with a coupon of 7¼% to yield 7 3/8%.

The deal priced at the wide end of its talk between 7% and 7¼% and carried a spread of Treasuries plus 282.8 bps.

ABN Amro, HSBC and JP Morgan brought the deal to market.

There is a change-of-control put at 101.

Gerdau is a Porto Alegre, Brazil-based steel manufacturer.

The issue traded as high as 2.00 over par in the gray market, a syndicate official said.

"In Latin America the market is open," the official said.

In Asia, Sri Lanka priced a $500 million five-year sovereign (/B+/BB-) at par with a coupon of 8¼%. Barclays Capital, HSBC and JPMorgan were the joint bookrunners for the notes, which mature on Oct. 24, 2012.

Pemex talks

Mexico's Petroleos Mexicanos released talk for its two new offerings (Baa1/BBB+/BBB).

The company plans to sell a new $1.5 billion 10-year bond, which has been talked between Treasuries plus 128 bps and 130 bps.

Pemex will also reissue $500 million of its 6 5/8% bonds due 2035, which have been talked at Treasuries plus 150 bps.

Credit Suisse, Deutsche Bank and Merrill Lynch will take the books for the deal.

Proceeds will be used to fund tender offers.

Pemex is a Mexico City-based state-owned oil monopoly.

"It was a huge amount they announced," a buyside source said.

"I would think that they might increase the size of the new deals," he said.

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