Gazprom deal waits for right moment; market still volatile but sees cautious rebound; Argentina strong

By Aaron Hochman-Zimmerman

New York, July 30 - In the primary market, Russia's OAO Gazprom continued to hold its ground - and celebrity attention, but was again unable to price.

In the secondary market, participants took their cue from Wall Street's revival Monday, as investors cautiously headed back into riskier areas such as equities, junk bonds and emerging markets debt. As the major stock indexes all turned upward - the bellwether Dow Jones Industrial Average gained 93 points - U.S. Treasury issues slipped, giving the emerging markets names a shot at some spread tightening.

Argentina was a notably strong performer, in contrast to its very weak behavior the previous week.

"Leads are hanging on," a syndicate desk official said about the interest in Gazprom's 30-year benchmark deal, adding that completing the deal will be difficult but not impossible for the Russian energy mammoth.

"At this point in the market, there is nothing wrong with taking a break," the syndicate official said.

The market is not in the proper condition for deals to be forced through, the official added.

Several more strong days are needed for Gazprom to complete its deal, according to another emerging markets syndicate official.

The Russian energy giant is now looking to price its closely watched benchmark-sized 30-year dollar-dominated offering (//BBB-) later in the week.

The notes are still being talked at 30-year Treasuries plus 220 to 225 basis points.

ABN Amro and Morgan Stanley are the bookrunners for the deal.

If Gazprom is able to price it will be good news for emerging markets overall, but should be "taken with a grain of salt," the syndicate official said. Because of its size and influence, Gazprom is not necessarily a proxy for smaller deals; it may be in a class by itself, the official said.

Gazprom has a history of printing cheap deals in bad markets, the official added.

On the other hand, if Gazprom is unable to complete a deal in this market, "it's very negative," the official added.

Nervousness remains

"The market remains volatile," said a syndicate desk official who specializes in European markets.

As evidence of the volatility the official pointed to "negative headlines" Monday morning about Germany's IKB Deutsche Industriebank which has been hurt by its "exposures to U.S. subprime real estate loans," according to an IKB press release.

"As long as the negative headlines keep coming, the volatility will remain," the official said.

"The overall story is getting better," said a syndicate official who added that fundamentals in most emerging market countries are in relatively good condition and are, "at worst, where they were three months ago."

The official said the troubles in emerging markets were brought by an "investor contagion" which spread from other unrelated sectors, especially the U.S. subprime market.

"It's not an EM-based problem," the syndicate official said.

"The smart money is betting the market will realize that by September," the official added, but suggested that even if the market becomes aware of its summer hesitancy earlier, full desk capacity will not return until September.

"Then it will be off to the races again," the official said.

Elsewhere in the market, "what's more unnerving today is that equity markets are up 86 points," said a syndicate official who conceded that the small increase is better than a drop, but is "not a serious response to last week."

The official, hoping for a true "snap back" in the market said things are "tighter" and "firmer," but did not feel that the improvement would sustain. Although by pricing, Gazprom may be able to lead by example, the official said.

EMBI+ tightens

In trading, the 10-year U.S. Treasury note's yield widened by about 4 basis points, to 4.81%, while the widely followed gauge of emerging debt performance and investor risk tolerance, the JP Morgan & Co. EMBI+ index, came in about 4 bps to 219 bps.

The day had started out inauspiciously, pretty much as a continuation of the funk seen last week, when EM names got walloped - at one point, the EMBI+ had widened out to around 230 bps before coming back in, with news of the stock gains igniting similar buying interest.

Traders saw Philippines five-year CDS contracts having narrowed from the wider levels to which they had moved out to in the early going. Argentina's bonds finally broke out of their long losing streak to end better. Mexico's local-currency bonds were quoted firmer on the day.

Philippine CDS levels tighten

A New York-based trader in Asian issues opined that "we're going out with a much, much better tone to the market. We had a pretty weak opening, led by weakness in Europe, but the market firmed up pretty quickly, and we've been seeing pretty good risk-taking by clients pretty much across the emerging markets spectrum today."

He characterized some of the spread tightening as "pretty sharp."

For instance, he said, the cost of a five-year credit default swaps contract used to hedge against the possibility of a default on Philippine government paper - widely used as a proxy for investor risk tolerance - was about 40 bps inside the overnight wide levels seen during the Asian trading day, which reached some 245 bps.

Even in New York, the contracts traded as wide as 235 bps, before coming in to around 205 bps at the close.

While the day's action certainly represented an improvement from the high levels to which the cost of those contracts had moved, the trader acknowledged that they were still well above the levels seen not so very long ago - at the end of June, for instance, those contracts were being quoted in a 108-110 bps context.

"It's still a long way wider," he admitted. "But if you look at it, we've clawed back close to half of Thursday's widening. We started at 150 [bps] on Tuesday or Wednesday of last week, went all the way out to 250 [bps], and now we're closing around 200 [bps]. That's a pretty good snapback from what was obviously pretty sharp widening."

He said that Indonesia, whose CDS contracts usually move pretty much in tandem with the Philippines, "assumed a similar magnitude of tightening," while high-grade names were also in from their wide levels by as much as 5 bps to 7 bps.

"We're seeing the start of some buying by real-money accounts in some of the hardest beaten-up sectors," such as Japanese and Indian bank capital names, "which have been hit very, very hard in the last couple of weeks - some guys are looking to come in and buy paper."

Earlier, during the local trading day in the Asian markets, the Philippine and Indonesian CDS levels had shot up, while the underlying bonds were lower, with Manila's 2031 benchmark bonds seen at

105.375 bid, 106 offered, down from Friday's levels around 106.25 bid, 107.25 offered - which themselves were well down from the previous day's 108.625 close, although its 2032 bonds were quoted at 92.75 bid, 93.25 offered, slightly above Friday, when those same bonds plummeted to 92.50 bid, 93 offered from 94.875 on Thursday.

Argentine debt in snappy rebound

Outside of Asia, Argentina's bonds - some of which had fallen by as much as 20% in value during last week's risk-aversion debacle - were seen up on average about 2% on the local markets, with the country's dollar-denominated external bonds - on the slide since July 13 - quoted up about 2.5% on the day.

The country's dollar-denominated 8.28% bonds due 2033 were seen up about 2½ points to close at 83.5 bid. The yield on those bonds narrowed by a dramatic 29 bps to around the 9.90% level.

The spread between Argentina's bonds and comparable Treasuries, which last week got as wide as almost 500 bps, came in on Monday by 25 bps to below 450 bps.

The cost of owning a 5-year CDS contract on Argentina fell by about 25 bps to 405 bps.

Brazil, Mexico, better

Apart from Argentina - clearly the major mover in Latin American debt circles - Brazil's bonds seen better, with the benchmark 11% notes due 2040 up 1.5 points on the day to 129.

The Brazil CDS contracted sharply on Monday to about 124.5 bps - well down from levels as high as 152 bps.

Mexico's peso-denominated bonds rose in line with the gains in that currency, buoyed by expectations that the country's central bankers would continue to show the kind of restraint they showed late last week, when they left the key lending rate at 7¼%, believing inflation remains under control and within reason.

The 7.25% notes due 2016 were seen having gained about 1/3 point on the day, closing around 96.84, while the bonds' yield came in by 5 bps to 7.72%. Average spreads versus Treasuries came in by about the same amount to 294 bps.

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