EM primary roars back; trading stronger despite equities; Mexico, Colombia, Turkey, Petrobras price deals

By Aaron Hochman-Zimmerman

New York, Jan. 8 - Issue prices were up all around emerging markets, even as equities sank deeper and the word recession was uttered with more shades of certainty.

Economists at one major bank were "pretty close to saying the R-word," a syndicate official said.

Meanwhile, away from the major markets new issues were flooding the primary.

Mexico priced a new sovereign along with Brazil's Petrobras while Colombia and Turkey both reopened existing issues.

"They're going to have to come up cheaper," another syndicate official said earlier in the day.

The buyers' market is not exclusive to emerging markets, he said, adding: "It will happen in every single market.

"The equity market is not helping today," he added.

Many hoped the new deals would spur confidence in emerging markets, but there was hesitation over whether or not all of the new paper could be absorbed.

A syndicate official called the bombardment of new deals during one session "irresponsible."

Trading success was overshadowed by the primary explosion and equity implosion.

"[There were] better flows today, better buyers in the morning prior to the turn," a syndicate official said.

Venezuela's 9.25% bonds due 2027 led the way amongst the benchmark issues with a gain of 1.05.

Volatility held flat for most of the session but spiked in the afternoon by 1.64 to close at 25.43, according to the VIX index. The index is a commonly accepted measure of market volatility.

Against Treasuries, emerging markets almost held still. JPMorgan's EMBI+ index tightened 1 basis point to a spread of 253 bps. The EMBI+ determines the amount of extra yield investors are willing to accept to hold money in emerging markets debt.

"There's plenty to keep people on their toes," a trader said.

Primary cracks open

Market watchers were waiting anxiously to see which direction the market would be taken by the early issuers of 2008.

"The key going forward is the performance of the corporate and sovereign new deals and taps," a trader said early in the trading day.

"It's the only meaningful barometer," he added.

Many investors got more than they bargained for.

"It's too much in a day when equities are down 2%," a syndicate official said.

With such a high volume in a short period of time, the effect on the market is not going to be good, the official said.

The United Mexican States (Baa1/BBB+/BBB+) priced a $1.5 billion 32-year sovereign bond at 99.93 with a coupon of 6.05%.

The spread of 170 basis points over Treasuries came at the tight end of talk for 170 bps to 175 bps over Treasuries.

Initial whispers had the spread in the "low 170s," a market source said.

Credit Suisse and Deutsche Bank had the books for the deal.

Also in Latin America, the Republic of Colombia reopened its 7 3/8% bonds due in 2017 and 2037 for a total of $1 billion.

Colombia sold $650 million of the bonds due 2017 at 109.5 to yield 6% and it sold $350 million of the bonds due 2037 at 110 to yield 6.5%.

Credit Suisse and Merrill Lynch brought the deal to market.

Proceeds from the deals will be used for general budgetary purposes in 2008.

The small size of the reopening of the notes due 2037 was cause for concern may indicate of lack of interest, said Enrique Alvarez a Latin America debt strategist at think tank IDEAglobal.

In general, "I don't know if the timing is the right one," he said.

"You have a very unstable background on the U.S. side," he said.

"A little more stability stepped in yesterday [Monday], but that says nothing about the background, he added.

The Republic of Turkey (Ba3/BB-/BB-) retapped its 6¾% notes due 2018 for $1 billion.

The bonds were priced at 103.34 which brought a yield of 6.3% and a spread of 246 bps over Treasuries.

The yield matched the talk of 6.3% and 103.34 area in price terms.

JP Morgan and Merrill Lynch were mandated as the bookrunners for the deal.

Proceeds from the sale will be used for general financing and budgetary purposes to include the repayment of debt.

In corporates, Petroleo Brasileiro SA (/BBB-) reopened its 5 7/8% 10-year global notes for $750 million at 100.113.

The price brought a yield of 205 bps over Treasuries.

Citigroup and HSBC acted as bookrunners for the deal.

Proceeds from the sale will be used for general corporate purposes which may include the repayment of debt.

Petrobras is a Rio de Janiero-based government-run oil producer.

The issue was later spotted trading 5 bps wider.

LatAm stronger on new sovereign offers

Latin American trading did not lose all of its early gains after equities began tumbling in the afternoon on worries about Countrywide Financial.

Investors across emerging markets and especially Latin America watched to see how well the sovereign parade would be received.

"Sometimes in emerging markets you have a static market, like the one we are in right now, then you have issuance come about and the market will tend to recede," said Alvarez.

However, over-saturation is unlikely, he said. "We don't have an overwhelming amount of supply."

Venezuela took the lead in trading as oil went over $96 per barrel.

The Venezuelan 9.25% bonds due 2027 repeated Monday's 1.05 climb to end the session at approximately 103.5 bid, 103.85 offered.

"Brazil comes up as a positive here," Alvarez said about its recent performance.

The highly watched 11% Brazilian bonds due 2040 were quoted up by 0.35 at approximately 135 bid, 135.175 offered. The bonds due 2037 added 0.5 to 114.5 bid, 114.85 offered.

Argentina's 8.28% discount bonds due 2033 were quoted up 0.55 to 95.25 bid, 96 offered.

"Peru is another credit which has been strong today," Alvarez said.

Peruvian pension funds have been authorized to be 16% externally supported, rather than 15%, he said.

"Peru has shown a stellar bid in the market these past few sessions," a syndicate official said.

Peru's government bonds due 2025 added 0.9 to trade at 115.15 bid, 115.75 offered.

Also, while Mexico was closing out the deal for its new sovereign, its bonds due 2034 slipped by 1 point to 110.15 bid, 110.8 offered.

Emerging Europe 'wider and weaker'

Quiet trading in emerging Europe felt very much like the days leading up to Christmas, a trader said.

"It's wider and weaker," although "we have seen some buying as well," he said.

The watershed event for emerging markets is the "reaction to the new deals," he said.

"If they can get absorbed," he said, they may be "a foundation for a more constructive month."

To a lesser extent, European investors are waiting for the results of the Bank of England meeting on Thursday.

"It's split even on whether they cut rates again," the trader said.

"It's 5.5% today, it may be 5.25% on Thursday, by the end of the year 4.5%, maybe even lower," he said.

President George Bush endorsed Turkey's bid for entrance into the European Union as he met with the Turkish president Abdullah Gul in Washington, D.C.

Bush said Turkey's entrance would be in the best interest of regional peace as the country could act as a bridge between the Muslim world and the West.

The Turkish sovereign bonds due 2030 were seen up 0.55 to trade at 157.75 bid, 157.875 offered.

As Russia's traders returned from Orthodox Christmas, the government bonds due 2030 were seen at 114.875 bid, 115 offered.

Asia clings to early gains

Asian trading ended the day slightly stronger even as equities brought a building storm cloud over the market in the afternoon.

In the Philippines, inflation grew to 3.9% in December, up from 3.2% in November, according to the central bank.

Throughout 2007 the average rate of inflation was 2.8%, according to the bank's website.

"This is well below the 4% to 5% target range for 2007 and the lowest annual average in 21 years," according to the website.

Most of the inflation was attributed to the rising prices of commodities, especially food and energy.

The Philippines' bonds due 2030 gained 0.625 to close at 133.875 bid, 134.375 offered.

Indonesia's Shariah compliant banking industry grew by 30% in 2007, 4% less than 2006, reported the Jakarta Post.

The retreat was blamed on a rise in non-performing transactions.

The Indonesian government bonds due 2017 tacked on 0.25 to close the session at 102.5 bid, 103 offered.

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