Emerging markets mixed to lower; Brazil prints retap as primary catches fire; High betas flame out

By Aaron Hochman-Zimmerman

New York, May 7 - Emerging markets were mixed as oil and inflation concerns weighed on the minds of traders into the afternoon.

However, the primary was jolted to life as Brazil reopened its 6% sovereigns due 2017 for $500 million and a host of other new issues moved further along the pipeline.

"Risk tolerance has been to a certain degree at least chipped at," said Enrique Alvarez, a Latin America debt strategist at think tank IDEAglobal.

"Everything seemed pretty active," he said, but the market was subject to some widening on Treasury action.

Argentina was again the goat of the day's trading. The benchmark discount bonds due 2033 shed 2 points as the farmers and government found almost no common ground.

After equities fell off the cliff, volatility jumped by 1.52 to end at 19.73, according to the VIX index. The index is a frequently used gauge of market volatility.

As Treasuries were moving forward, emerging markets' spreads were pushed wider by 5 basis points to a spread of 254 bps, according to JPMorgan's EMBI+ index. The EMBI+ estimates the amount of extra yield investors will demand to hold assets in emerging markets debt.

Brazil throws primary carnivale

With one sovereign issue priced and three corporate deals moving, Brazil made a busy day in the primary by itself.

The Federative Republic of Brazil (Ba1/BBB-/BB+) retapped its 6% sovereigns due 2017 for $500 million at a price of 104.816 and a yield of 5.299%.

The deal came at a spread of Treasuries plus 140 bps.

Deutsche Bank and HSBC were the bookrunners for the registered deal.

The bonds have a make-whole call at Treasuries plus 25 bps.

The total issue is now more than $2.5 billion.

The issue had been trading at 144 bps bid, 134 bps offered, as the deal priced "almost exactly at the midpoint," Alvarez said.

The time seemed right as Brazil was likely watching the Treasury curve as well as creeping inflationary pressures, he said.

Brazil was also able to cash in on the momentum remaining from the recent Standard & Poor's upgrade, he said.

On the corporate side, Brazil's Independencia International Ltd. (B3/B) talked its $250 million seven-year senior unsecured bonds in the 10¼% area.

The deal is expected to price on Thursday.

Banco Santander will act as the bookrunner for the deal.

Proceeds will be used to refinance existing debt.

Independencia is a Jordanesia, Brazil-based and Cayman incorporated beef producer.

The "Indep deal is struggling," said a source, who specializes in Latin American corporates.

Also, Banco BMG SA (Ba1) released talk in the 7 3/8% area for its $150 million three-year bonds.

The deal is expected late in the week of May 12.

BCP Securities and UBS were asked to act as bookrunners for the deal.

Banco BMG is a Belo Horizonte, Brazil-based retail and commercial bank.

Finally, Braskem SA (Ba1/BB+/BB+) announced it plans to offer investors $1.2 billion in debt over two separate issuances, according to a market source.

Braskem is a Sao Paulo-based petrochemical firm.

Korail talks, Indonesia picks banks

Asia provided less action than Brazil but still made its presence felt in the primary.

Korea Railroad (Korail) (A2/A) issued talk of Treasuries plus 160 bps to 170 bps for its $300 million five-year senior unsecured bonds.

Citigroup, HSBC and Morgan Stanley will act as bookrunners for the deal.

There is a change-of-control put at par if the government ceases to own and control more than 51% of Korail stock.

Korail is a Daejong, South Korea-based government railroad operator.

"That looks like a pretty reasonable spread for the Korean government," a trader said about the talk.

Meanwhile, the Republic of Indonesia announced that Credit Suisse, Deutsche Bank and Lehman Brothers will act as the bookrunners for its $1.5 billion offering expected in June.

"The curve has steepened," the trader said about Indonesia as "the long end has underperformed pretty hard against the Philippines."

Indonesia may try to place the new sovereign farther to the end of the curve, but will come back to a mid-range offer if the market does not accept something on the longer side, he said.

Also, Singpore's ASL Marine Holdings Ltd. established a S$300 million debt program, which will be managed by DBS Bank, according to a press release.

ASL Marine is a Singapore-based shipping company.

High betas slam LatAm trading

The secondary market in Latin America was not as successful as the primary on Wednesday, but the market was not as bad as certain isolated issues, said IDEAglobal's Alvarez.

"You had pressure in individual credits with Argentina at the top of that ranking," he said.

High oil prices dragged on the market as a whole, but it did not amount to a blessing for oil-producer Venezuela.

"There's a big inflation scare moving thru the markets off crude oil," Alvarez said.

Light sweet crude was seen trading just short of $124 per barrel.

The Venezuelan 9¼% sovereigns sank between 1.25 points and 2 points, Alvarez said.

The issue was quoted at 89.75 bid, 91.4 offered.

Brazil's preeminence in the primary did not save it in trading.

The 7 1/8% Brazilian bonds due 2037 were lower by 0.5 point to 114.25 bid, 114.85 offered.

Farmers, government sow discontent

In Argentina, "things are headed for the worse," Alvarez said.

Early on "the government ... admitted export taxes are a problem the government is willing to modify," Argentine Agricultural Federation chief Eduardo Buzzi said after meeting with cabinet chief Alberto Fernandez, according to the Buenos Aires Herald.

The sides seemed as though they may have been able to make progress toward reconciliation, but "then things began to fall out of place," he said.

"The government was accusing the farmers of extortion and the farmers were planning to block the roads again," he said.

The 8.28% Argentine discount bonds due 2033 plummeted 2 points to 78.75 bid, 79.75 offered.

Inflation, oil pull down Asia

Asian trading stayed on the quiet side, a trader said, as the "overall tone is obviously pretty soft" as equities suffered through the afternoon.

Also, "there's been some more wobbles in the local markets and concerns over inflation," he said.

"The tone in the high yielding sovereigns has been pretty weak."

Even the new issue from Indonesia is neither a surprise nor a help to an oversupplied market.

"It's been selling off hard now for a week or two," a trader said about Indonesian credit.

"There's probably some shorts covered here, but it might be another month until the deal comes," he said, adding: "That's a long time to run a short position."

The Indonesian sovereigns due 2017 were off by 0.625 point to 101.25 bid, 101.75 offered.

Meanwhile in Philippines, Moody's Investors Service warned Asian countries to closely monitor their inflation pictures.

"The Philippines, the world's largest rice importer, recently canceled a tender to buy rice due to poor response from suppliers," said Sherman Chan, a Moody's economist, according to the Manila Times.

The peso was seen trading at 42.526 to the dollar.

The Philippine government bonds due 2030 were lower by just 0.125 point at 131 bid, 131.5 offered.

Elsewhere, Pakistan's government bonds due 2017 were quoted at 83 bid, 88 offered.

Emerging Europe up as Medvedev sworn in

Having been spared the equity meltdown, emerging Europe was trading with a healthy tone and a steady gait on Wednesday, a trader said.

Trading felt strong "on all the Russian names," a trader said, "not just the new corps."

"I'm racking my brains for reasons why," he said.

Maybe, "for no other reason than [president Dmitry] Medvedev was sworn in and its sunny," he said.

Russia's new president quickly nominated outgoing president Vladimir Putin to be prime minister and placed a heavy emphasis on the rule of law over both society and economy.

"My most important aims will be to protect civil and economic freedoms," he said in Moscow's St. Andrew's Hall.

Medvedev is widely expected to remain under the backchannel mentorship of Putin, whose popularity remains high.

Still, some analysts have suggested that Medvedev may be able to wield power in his own right sometime in the future.

In the United States, the White House took the opportunity to appeal to the new president to back off of decisions made regarding the tensions in Georgia.

"The Russian government has taken what we would call provocative actions, which have increased tensions with Georgia over its separatist regions of Abkhazia and South Ossetia," said White House press secretary Dana Perino.

Meanwhile, Georgia withdrew from a bilateral air defense treaty with Russia on Monday and "is really extremely close to a war, but Georgia is itself to blame for this," said Dmitry Rogozin, Russia's envoy to NATO, on Tuesday.

Also in Russia, consumer gas prices are expected to start rising, said Valery Yazev, State Duma deputy speaker and president of the Russian Gas Union, according to the Itar-Tass News Agency.

"Oil prices continue to grow against the background of the increase of the world demand for fuel," Yazev said, predicting a rise in oil prices to $160 per barrel.

The Russian sovereign bonds due 2030 added 0.15 point to 115.125 bid, 115.25 offered.

Turkey may up lending rate

In Turkey, economy minister Mehmet Simsek downplayed the speculation that the government has been at odds with the central bank, according to the Turkish Daily News.

Simsek insisted that the bank is independent yet "we are working in harmony and our dialogue is good," he said in the report.

The inflation target of 4% has remained elusive for the past three years, but Simsek conceded that Turkey is not the only developing country that has missed inflation goals.

External factors such as food and energy prices have been a large part of the inflation picture, he said.

Many believe central bank governor Durmus Yilmaz has indicated that the benchmark lending rate will increase from 15.25% on May 15.

The lira was seen trading at 1.256 to the dollar.

The Turkish government bonds due 2030 were better by 0.25 point at 153.5 bid, 154 offered.

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