Emerging markets lose some steam; primary market prices $2.65 billion; Turkey bonds still rallying

By Aaron Hochman-Zimmerman

New York, July 31 - Emerging market bond trading lost the help of U.S. equities and weakened over what remained low summer volumes.

Meanwhile, the volume in the primary picked up considerably as Russia's OAO AK Transneft and Hong Kong & China Gas Co. Ltd. combined to price $2.65 billion.

On the sovereign side, Lebanon also announced plans to print paper on Friday.

In trading, Turkey was still on investor shopping lists after the government won its landmark closure case.

The benchmark bonds due 2030 added 1.1 points.

In the broader market, volatility remained above its open all session but spiked near the close to finish up by 1.73 at 22.94. The index is a standard yardstick of market volatility.

Treasuries mounted a comeback on Thursday, which sent emerging markets wider by 5 basis points to a spread of 283 bps, according to JPMorgan's EMBI+ index. The EMBI+ determines the amount of extra yield investors will demand to hold assets in emerging markets debt.

Primary heats up

The primary pulled out the stopper from the pipeline as two issuers teamed up to price $2.65 billion.

Hong Kong & China Gas (A1/A+/) priced $1 billion 10-year senior notes at 99.319 with a coupon of 6¼% to yield 6.343%.

The notes matched talk at a spread of Treasuries plus 237.5 bps.

HSBC and Morgan Stanley were bookrunners for the deal.

The proceeds will be used to refinance debt or for general corporate purposes.

Hong Kong & China Gas is a Hong Kong-based gas and utility company.

Also in the primary, AK Transneft (A2/BBB+) priced $1.65 billion loan participation notes in two tranches.

The $600 million five-year tranche priced at par to yield 7.7%, or Treasuries plus 444 bps.

The $1.05 billion 10-year tranche priced at par to yield 8.7%, or Treasuries plus 473 bps.

The tranches were talked at mid-swaps plus 350 bps and 415 bps, respectively.

Credit Suisse acted as bookrunner for the issue.

Proceeds will be used for investment projects and general corporate purposes.

Transneft is a Moscow-based gas pipeline operator.

Turkey flies, emerging Europe lags

Turkey continued to be emerging Europe's clear outperformer after the constitutional court ruling Wednesday, which allowed the AK Party to remain at the head of the government.

"Turkey was quite the mover of the day ... massive, massive tightening," a trader said.

The benchmark Turkish bonds due 2030 were up 1.1 points to 150.25 bid, 151 offered.

The credit traded better even just ahead of the court's ruling, he said.

"It was the expected decision," but had the ruling been against the AKP, the credit would have unraveled by about 100 bps, the trader estimated.

Also in Turkey, nine more arrests were made in connection to the bombs that ripped through Istanbul on Sunday, reports said.

About 150 persons were injured and 17 were killed.

No group has claimed responsibility, but the government ordered air strikes in Kurdistan Workers' Party (PKK) positions in Iraq in retaliation.

Otherwise in the market, "there's not a great deal of flow or a great deal of trading," he said.

Russia's five-year CDS inched wider by 3 bps bid to 100 bps bid.

The Russian government bonds due 2030 added just 0.05 point to 112.5 bid, 112.625 offered.

Meanwhile in corporates, the state's energy firm OAO Gazprom said its year-over-year first-half profit rose to $12.2 billion from $5.9 billion in the first half of 2007, according to the RIA Novosti News Agency.

Gazprom produces almost 20% of the world's and 85% of Russia's natural gas, the report said.

Lebanon plans $500 million issue

Also in the European time zone, the Republic of Lebanon (B3/CCC+/B-) talked its $500 million seven-year bonds at 8 5/8%.

Blom Bank, Byblos Bank and Deutsche Bank will act as bookrunners for the deal.

Books were scheduled to close on Thursday with pricing on Friday.

LatAm widens with Treasuries

The U.S. markets provided the main drivers for Latin America on Thursday as issues were slipping wider.

"The changes in Latin America haven't been huge," said Enrique Alvarez, a Latin America debt strategist at think tank IDEAglobal.

Still, "Peru in particular has been solid," he said as the market is expecting the country to release a new plan to deal with inflation.

The reason for the outperformance is a little unclear, he said.

"I don't think this is a portfolio shift," he said as Peru is thought of as a lower-beta credit.

The sol was seen trading at 2.844 to the dollar.

Meanwhile, in high-beta Argentina the government hiked electricity rates by 21% in residential areas and plans to raise rates "at most" 10% for commercial areas, the Buenos Aires Herald reported.

The 8.28% Argentine discount bonds due 2033 slipped 0.25 point to 77.5 bid, 78 offered.

"There was a little underperformance in Venezuela," Alvarez said.

The 9¼% bonds fell by 0.2 point to 91.15 bid, 91.4 offered.

In Ecuador, president Rafael Correa will negotiate with former bank owners with outstanding debt rather than launch into nationalizations as in the recent case involving media outlets, Alvarez said.

The 8% Ecuadorian sovereign bonds due 2030 added 0.75 point to 92 bid, 93 offered.

Elsewhere, "Mexico was dragged by Treasuries and was obligated to rise," he said. "It's had a better tone than the rest of Latin America."

Also in Latin America, Brazil's 7 1/8% bonds due 2037 were just lower by 0.1 point at 110.25 bid, 110.95 offered.

Asia softens

Asia bonds widened slightly on light volumes as equities took a late-day dive on Thursday.

In the Philippines, the central bank published its second-quarter inflation figures.

"Against the background of a continuous surge in energy and food prices, average headline inflation rose to 9.7% from 5.6% in the previous quarter, the bank said in a statement.

"The strong price dynamics of food and oil have also started to feed into other prices, as evident in the uptrend in core inflation," the statement continued.

The peso was seen trading at 44.090 to the dollar.

Also, government representatives to the world trade talks in Geneva said that small economies are left to fend for themselves while the United States and other world powers struggle for influence, according to the Manila Times.

"It's a fight among what the United States wants, what China wants, what the U.S. wants of other big countries - and it is difficult for a third-[world] country like us," said executive secretary Eduardo Ermita in the report.

Little progress was made as the United States and India could not agree over "special safeguard mechanisms" for the agriculture sector, reports said.

In Indonesia, as the implementation of a program to reduce certain hazardous waste chemicals nears, the ministry for the environment set up an education program for the country's industry, according to the Jakarta Post.

The government is expected to ratify the Stockholm Convention on Persistent Organic Pollutants (POPs), which regulates the emissions of certain chemicals.

"The national program will serve as a guideline for industrial companies to limit their POP emissions to avoid negative environmental impacts," said minister for the environment Rachmat Witoelar in the report.

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