Emerging markets pushed lower; Petrobras prices $1.5 billion bonds; currencies cause headaches

By Aaron Hochman-Zimmerman

New York, Feb. 4 - Emerging markets held onto sentiment early in the day, but the tone fell off with headlines later in the day.

The headlines followed a different story than typical trouble from the United States.

Currencies weighed on credit around emerging markets as one trader noted: "When the Asia guys are following [Mexico's] peso ... the situation in LatAm is deteriorating," he said.

"And that is the precursor to what we're going to see in the next couple months," he said.

Mexican bonds were not especially damaged by the day's news, but other levels were dragged wider by currency concerns, particularly in emerging Europe.

Meanwhile in the primary market, investors were left hanging without news from Indonesia, but Brazil's state energy firm Petroleo Brasileiro SA managed to price $1.5 billion at a yield of 8 1/8%.

From the major markets, equities slid and volatility spiked in the afternoon to close higher by 0.79 at 43.85, according to the VIX index. The index is a commonly used yardstick of market volatility.

As a sector, emerging markets tightened by 1 basis point to a spread of 639 bps, according to JPMorgan's EMBI+ index. The EMBI+ calculates the amount of extra yield investors will demand to hold assets in emerging market debt.

LatAm sinks sentiment

Latin America was cause for worry on Wednesday as Mexico's central bank was forced to come to the rescue of the peso.

The Mexican bonds were not affected terribly by the news, but levels have been generally softer as local market investors have dashed to the dollar in recent days.

"We've seen the external debt a little wider," a buysider said.

The 5 5/8% Mexican bonds due 2017 were quoted at 95.7 bid.

The peso was seen trading at 14.4365 to the dollar.

Meanwhile, in the primary Petrobras priced $1.5 billion 10-year global bonds at 98.28 with a coupon of 7 7/8% to yield 8 1/8% (Baa1/BBB/BBB).

The bonds traded 0.6 point higher in the gray market and priced to the tight end of talk in the 8¼% area.

HSBC, JPMorgan and Santander acted as bookrunners for the deal.

Petrobras is a Rio de Janeiro-based government-run energy firm.

On the sovereign side, the 11% Brazilian bonds due 2040 were seen at 122.25 bid, 122.5 offered.

Elsewhere in the category Argentina's 8.28% discount bonds due 2033 were unchanged at 33.25 bid, 34 offered.

Emerging Europe rolls wider

Emerging Europe has become of victim of "apathy in the market," a London-based trader said, as the term "Eastern European financial crisis" has floated around trading desks.

The apathy bled over as the proposed €1 billion from the Czech Republic continued to "linger" without any news.

However, primary action picked up from Germany's KfW, which announced the offer of Egyptian pound denominated one-year bonds.

JPMorgan will act as the bookrunner for the registered offering.

Also in the primary, Poland has been "chasing deals," the trader said.

A yen or Swiss franc deal is expected "quickly," he said, after the government priced €1 billion five-year eurobonds at 99.725 with a coupon of 5 7/8% and a spread of mid-swaps plus 300 bps on Jan. 22.

The news of another helping of supply has pushed the CDS spread "a lot wider," the trader said, but "it has come back slightly."

Currencies have had the largest effect on spread levels in Central Europe; the currencies have weakened in Hungary and Romania, the trader said.

"CDS didn't really move yet, but it will," he said, as in recent sessions "credit was the only asset class which has been outperforming."

Still, the most volatile mover in the emerging European secondary was Kazakhstan, the trader said, as the five-year CDS swung between 1,150 bps bid and 1,075 bps bid.

Elsewhere in the category, Turkey is likely to receive a $400 million investment from Russia's private oil firm OAO Lukoil, according to the Hurriyet Daily News.

Lukoil expects to acquire Turkey's Akpet oil firm by July 2008, the report said.

"With this investment, we are planning to develop our oil network in Turkey and raise our market share to 10%," Lukoil president Vagit Alekperov told reporters.

The Turkish sovereign bonds due 2030 were unchanged at 141 bid, 142 offered.

Russia downgraded

Meanwhile in Russia, Fitch Ratings downgraded the sovereign credit to BBB from BBB+ with the falling price of oil.

"It didn't affect it," the trader said.

Despite, a strong Russian dependence on the faltering oil market, investors still found enough risk appetite for the Russian sovereign compared to many other emerging market plays, which are considered "high risk."

Light sweet crude was seen trading at $40 per barrel.

The Russian government bonds due 2030 were seen slightly lower by 0.25 point at 92 bid, 92.375 offered.

Asia waits for Indonesia

Asia remained quiet on Wednesday as investors awaited talk on the issue from Indonesia, a trader said.

No details or substantiated rumors about the well-contained deal were available.

"It's a mystery," he said.

"We're sick of them crying wolf," a buysider said about the constant rumors of the deal, which has not yet launched.

Sentiment was mixed early in the day, but the usual cracks in the facade were visible in the afternoon when "the normal weakness came around," he said.

Despite the threat of more supply, the Indonesian bonds due 2018 held unchanged at 78 bid.

Meanwhile, daily gas production will only rise to 7.50 billion cubic feet per day compared to 7.46 billion cubic feet per day in 2007, the Jakarta Post reported.

The slight increase is expected as lower production in many fields will be balanced by the Tangguh field, the report said.

Also, sporadically improved attention was paid to Pakistan's bonds as the issue due in 2009 reaches maturity.

The Pakistani bonds due 2016 were quoted at 43 bid, while the bonds due 2017 were seen at 42 bid.

Elsewhere in Asia, the Philippines' bonds due 2030 added 0.25 point to 114 bid.

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