Emerging markets roll back; Taqa prices $1.5 billion of notes in two tranches; Argentina bonds slip

By Aaron Hochman-Zimmerman

New York, July 24 - Emerging markets were drawn wider as the strong support that had been provided by the U.S. market fell out from underneath the sectors.

"There was a big bid for safety" in the major markets, said Enrique Alvarez, a Latin America debt strategist at think tank IDEAglobal, as investors moved quickly to Treasuries.

On a more typical summer's day than recent sessions, the market felt very "illiquid and weak," a trader said. "It's not a good combination."

In trading, Argentina gave up some of its recent resiliency after the government announced it will seek back taxes dating from before the controversial tax hikes.

The benchmark discount bonds due 2033 fell by 1 point.

However in the primary, Abu Dhabi National Energy Co., known as Taqa, had the primary stage all to itself as it priced $1.5 billion over two tranches.

In the broader market, equities tumbled as volatility made a steady climb into the afternoon to end higher by 2.13 at 23.44, according to the VIX index. The index is a frequently used gauge of market volatility.

A flight to safety in the U.S. markets pulled emerging markets wider by 12 basis points to a spread of 284 bps, according to JPMorgan's EMBI+ index. The EMBI+ estimates the amount of extra yield investors are willing to accept to hold assets in emerging markets debt.

Taqa prices $1.5 billion

While most of the primary felt "a sort of a summer doldrum," IDEAglobal's Alvarez said, the issuers in the European time zone continue to take advantage of windows in the market where they exist.

Russia has produced the bulk of new issues in recent weeks as the "other regions have less funding," a syndicate official said.

Abu Dhabi National Energy (Aa2/AA-) priced the day's only new issue, but unlike its Russian colleagues in the primary, this deal "is the first Rule 144A corporate deal from the Middle East all year," the syndicate official said.

Taqa was able to price $1.5 billion over two senior unsecured tranches each at a spread of Treasuries plus 325 bps.

The $1 billion 6.6% five-year notes came at 99.941 to yield 6.614% and matched their talk at a spread in the Treasuries plus 325 bps area.

The $500 million 7¼% 10-year notes came at 99.845 to yield 7.272% and also matched their talk at a spread in the Treasuries plus 325 bps area.

The 30-year notes, which were talked in the Treasuries plus 340 bps area, were cut from the deal.

Barclays, National Bank of Abu Dhabi and RBS were bookrunners for the offering.

Proceeds from the sale will be used to refinance outstanding debt.

The notes come from a $9 billion medium-term note program.

Taqa is an Abu Dhabi-based energy firm.

The deal had the benefit of generally being the "only one out there," a syndicate desk official said, although there were some "obstacles to maneuver through, some tricky conditions in the broader market."

"It felt good to me," the syndicate official said.

Emerging Europe wider

With floundering U.S. equities, investors ran for Treasuries and drove spreads in emerging Europe wider.

In Russia, bonds issued by the oil firms OAO Gazprom, OJSC Rosneft and Lukoil OAO have been slow to make gains on the back of the recent spike in oil prices, a market source said.

As the oil market dips even lower in the near term, the oil firms' relatively low prices present a strong buying opportunity, the source said.

In Turkey, a survey of the top 500 companies placed the Turkish Petroleum Refineries Co. at the top of the list with 18.5 billion lira in sales, followed by Ford Otomotiv with 6.2 billion lira in sales.

By sectors, automotive companies accounted for a leading 31% of exports valued at $16.9 billion and metals placed second with $11.2 billion in exports.

Also in Turkey, air force jets were again over Iraq late Wednesday conducting strikes against the Kurdistan Workers' Party (PKK).

LatAm slides sideways

"Everything's pretty much sideways" in Latin American trading, IDEAglobal's Alvarez said on Thursday.

In Argentina, bond prices were "backtracking" after the government announced it will charge back taxes on farm goods from the period before the tariffs were increased.

However, the announcement that Tigre's mayor, Sergio Massa, will replace Alberto Fernandez as cabinet chief was received well by market watchers.

Also, many among the opposition to president Cristina Kirchner, who called for the resignation of Fernandez, praised the selection of Massa but still demanded more changes, including the removal of domestic trade secretary Guillermo Moreno, the Buenos Aires Herald reported.

The 8.28% Argentine discount bonds due 2033 shed 1 point to 77.4 bid, 77.75 offered.

Elsewhere in Venezuela, many who follow the market and the political situation in the region have expressed concerns over the possible expansion of the Venezuelan military with Russian equipment.

President Hugo Chavez may be close to purchasing man-portable air defense (Manpad) shoulder fired missiles as well as Il-76 cargo aircraft and T-90 tanks, the RIA Novosti News Agency reported.

"He spoke about Su-30s," Alvarez said about Chavez's suspected interest in the fourth generation Russian fighter known as the Flanker to NATO countries.

Chavez has also considered building his offensive ballistic missile fleet, which would consume a major piece of the government's budget, Alvarez said, "So we'll see if he's willing to make the investment."

Also, while on his world tour, Chavez also answered questions of a possible Russian military installation in Venezuela with flat denials.

The 9¼% Venezuelan sovereigns added 0.4 point to 91.5 bid, 92.15 offered.

Brazil hikes rates 75 bps

In Brazil, the central bank announced a 75 bps rate hike to 13% in order to combat inflation.

"There's a lot of tightening in the domestic curve," Alvarez said on Thursday, adding that "the external curve is slightly improved today."

Investors were encouraged by the bank's "strict adherence" to meeting its inflation targets, he said.

The real was seen trading at 1.578 to the dollar.

The 7 1/8% Brazilian bonds due 2037 added 0.45 point to 110.5 bid, 110.95 offered.

Asia weakens with externals

"It's pretty thin" and "it's a fair bit weaker," a trader said about Asian credit on Thursday as the support from the U.S. markets eroded.

Higher-beta credit widened by about 10 bps across the board, while lower-beta issues were only wider by about 5 bps, he said.

In the Philippines, the Finance Department announced that the country's debt ratio will be reined in to manageable levels within two years, the Manila Times reported.

The GDP ratio will fall below 50% in 2010, the report said, while in 2007 the ratio hit 55.8%, down from 63.8% in 2006.

The Treasury Bureau also reported a drop of PHP 7.7 billion in government debt in March, leaving the total debt at PHP 3.8 trillion through April, compared to PHP 3.9 trillion over the same period of 2007.

The Philippine government bonds due 2030 were spotted at 126 bid, 126.5 offered.

Meanwhile in Indonesia, after the central bank's recent 25 bps rate increase to 8.75%, private banks may be preparing to raise their interest rates on time deposits, the Jakarta Post reported.

"The rise in interest rates on time deposits might prompt banks to increase their lending rates to adjust to the cost of funds," said Kostaman Thayib, retail banking director of Bank Mega, in the report.

Many banks offer returns of about 2.5% to 2.75% on dollar deposits of one year or less.

Rupiah deposits earn a wider range from about 5.5% to 8.5%, the report said.

The Indonesian sovereign bonds due 2017 were seen at 99 bid, 99.5 offered.

Vietnam hits inflation high

In Vietnam, the government reported an inflation rate of 27% in July, which is the highest inflation rate in 16 years.

Food and fuel costs have damaged economies across the world and especially in Asia, even as oil prices have begun to ease.

However, the government has pledged to do more to control rising costs even at the expense of Vietnam's high growth rate.

Despite the bad news, "there actually was some buying of Vietnamese government bonds overnight," the trader said.

"It seems the reaction was different than you would've otherwise expected," he said, but the gains were generally swept away in New York trading.

The dong traded at 16,750.00 to the dollar.

The Vietnamese sovereigns due 2016 were quoted at 95 bid, 96 offered.

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