Emerging markets up with supply; Gazprom, Medellin ready to price; Treasuries widen spreads

By Aaron Hochman-Zimmerman

New York, July 21 - Emerging markets were heavily concentrated on the primary market again on Tuesday, but not entirely at the expense of trading.

No deals priced, but Russia's OAO Gazprom and Colombia's Empresas Publica de Medellin ESP issued talk and stood ready for Wednesday.

Many investors recently felt as though the current rush of new issues was merely a race to finish financing before an artificial August holiday deadline, however sentiment has been strong enough to sustain the pace, some have said.

"I'm sure it'll carry on," a trader said.

In spread terms, "right now we'll drift through summer and tighten into autumn," he said, unless "something from left field" or some kind of "pig flu" came to stop it.

"Technically, there's still not that much paper in the street," he said.

"I think the U.S. will be a bit busy; Europe may take August off," a syndicate official said.

Tuesday saw a slight uptrend in trading volume which was mostly positive.

"There have been a few offers lifted and a few offers pulled," a trader said.

Poland's retapped 6 3/8% bonds added nearly 2 points after pricing Monday and on the corporate side Korea Electric Power Corp. continued to press towards a spread 70 basis points tighter that its pricing on July 13.

From the major markets, volatility was up during early trading, but took a plunge into the late-afternoon hours and ended lower by 0.53 at 23.87, according to the VIX index. The index is a common measure of market volatility.

Treasury yields were slightly lower on Tuesday which pulled emerging markets wider by 10 bps to a spread of 416 bps, according to JPMorgan's EMBI+ index. The EMBI+ determines the amount of extra yield investors will demand to hold assets in emerging market debt.

Deals talked, ready to price

Gazprom talked each of its two benchmark-size five-year six-month tranches (Baa1/BBB/BBB).

Guidance was set at 8½% for the dollar-denominated bonds, while guidance was set at 8¾% for the euro-denominated piece.

The deal is scheduled to price on Wednesday.

JPMorgan and Morgan Stanley will lead the dollar-denominated deal and BNP Paribas and Societe Generale will lead the euro-denominated issue.

The dollar-denominated bonds will be offered under Rule 144A and Regulation S. The euro-denominated will be offered under Regulation S only.

Both of the separate roadshows ended on Tuesday.

Proceeds from the sale will be used to refinance existing debt and for general corporate purposes.

Gazprom is a Moscow-based government-run energy firm.

Also in the pipeline, Empresas Publica de Medellin ESP issued talk in the 8% area for its $500 million 10-year senior unsecured bonds (Baa3//BB+).

Bank of America Merrill Lynch and JPMorgan will act as bookrunners for the bonds scheduled to price Wednesday.

Proceeds will be used for general corporate purposes.

Empresas Publica de Medellin is a Medellin, Colombia-based energy firm.

"It's going to go well," a strategist said, "every single deal is going well."

Emerging Europe flies higher

Emerging Europe was "busy this afternoon," a trader said with a mixture of new paper and traditional bonds changing hands.

Europe was strong, the Middle East was strong, "the market is a rocker," he said.

Investors snapped at Poland's retapped 6 3/8% 10-year bonds, a syndicate official said.

The sovereign priced $1.5 billion at 99.786 and a spread of Treasuries plus 275 bps on Monday.

The strong tone spurred buyers to drive up price levels as far as 101¾ bid, 102 offered on Tuesday.

There was a lot of anticipation surrounding the Dolphin Energy Ltd. 10-year deal from Abu Dhabi, he said.

No new information was available, but "as long as the market's in this mood, I'm sure it'll do fine," he said.

"A lot of stuff traded today," he said, particularly in Russia.

"There was interest in the Russian banks," he said.

Russian Agricultural Bank's 9% bonds. which priced at par on June 4, were seen at 102 bid, 103 offered.

The new 11¾% bonds due 2015 from Kazakhstan's KazMunaiGaz were at fresh highs near to the end of the session in London, the trader said.

The bonds priced on Friday and hung at ¼ to 3/8 point over the reoffer price of 99.014.

The levels gradually improved, but "it took a while for them to get going," he said.

Late Tuesday they were seen trading at 100¼ bid, 100½ offered.

Sovereigns sit

Emerging Europe's corporate space was flying along with the newly retapped bonds from Poland, however, the traditional eastern European sovereigns enjoyed a more measured success.

In Ukraine, president Viktor Yushchenko appealed to visiting U.S. vice president Joe Biden for help attracting U.S. and other foreign investors for upgrades to the Ukrainian gas transport network, reports said.

Kiev is looking for "as many investors as possible, including U.S. investors," Yushchenko said.

A more reliable system would help guarantee the West's energy security and make Ukraine a more reliable partner with Europe, Yushchenko said.

The talks between the two also dealt with Ukraine's aspirations to join NATO.

Yushchenko was looking for "alternatives to Russian money," a trader said.

The Ukrainian sovereigns due 2016 were unchanged at 69½ bid, 71½ offered, while the Russian bonds due 2030 improved by 5/8 point to 99 5/8 bid, 99¾ offered.

After leaving Ukraine, Biden will visit Georgia where president Mikhail Saakashvili announced a program of reforms.

Details were scant, but Saakashvili's words were broadly welcomed.

"We should end the rhetoric of civil war and public confrontation," he said during a session of parliament. "We should all understand that we should build our country not by shouting in the street, but by civilized means, through elections," he added.

Turkey looks for markets

Meanwhile in Turkey, the sharp decline in European export markets has forced Turkish businesses to search for markets in Latin America and Africa, the Hurriyet Daily News reported.

The leader of the trade group Turkish Exporters' Assembly, Mehmet Buyukeksi, has been working to reduce a 3½% tariff which would be imposed by the Marcos zone, the report said.

"There is a 3½% customs duty on imports from these countries due to a customs union deal that Turkey signed, but we are burdened by the 30% duty on Turkish exports to such countries," Buyukeksi said.

The Marcos zone includes Argentina, Brazil, Paraguay and Uruguay.

Trade with Africa may be more difficult to establish, he said, but Senegal and Uganda seem to be reasonable targets, he said.

The Turkish government bonds due 2030 added ½ point to 155 bid, 155½ offered.

LatAm sovereigns glide higher

Latin America was filtering through a series of new deals on the corporate side while the sovereigns largely made their way higher on improved sentiment and U.S. Treasury moves.

"The whole market has had a very strong bid today," said Enrique Alvarez a Latin America debt strategist at think tank IDEAglobal.

Colombia's Ecopetrol SA found "more of the same," he said.

"It's sort of a quasi-sovereign," he said and the addition of the supply imposed "no major offset" on Colombia's paper.

The 8 1/8% Colombian bonds due 2024 were lower by ½ point to 108½ bid, 109 3/8 offered.

In Mexico, the government and economy seems to be "taking the low employment on the chin," he said.

Sales and exports of discretionary items will likely fall, but the bonds remained "flat-ish," he said.

The Mexican 5.95% bonds due 2019 were better by ½ point to 103 bid, 104½ offered.

Also, a U.S. Government Accountability Office labeled Venezuela an impediment to the United States' counternarcotics fight in the region.

"Limited political support, particularly in Venezuela, and corruption have also hindered U.S. counternarcotics efforts," the report read.

Venezuela was singled out in the summary of findings, but the Dominican Republic, Ecuador, Jamaica Mexico and Panama were also noted as being plagued with drug traffickers, along with Mexico.

The 9¼% Venezuelan sovereigns due 2027 added 3/8 point to 66½ bid, 67¾ offered.

Profits out of Argentina

"In mid-afternoon you saw a small surge of profit taking in Brazil and Argentina too," Alvarez said.

The dissipating interest in Argentina was surprising, he said as the government seemed as though it would be willing to consider buying back inflation-linked paper.

Plus, the government may go as far as introducing new CPI calculations which would complement the highly mistrusted figures that are currently published.

There was also hope that the inflation-linked paper would be swapped for fixed-rate paper, Alvarez said.

If that is the case, "that's pretty interesting," he added.

The 8.28% Argentine discount bonds due 2033 fell 1 point to 54 bid, 54½ offered.

The 11% Brazilian bonds due 2040 were quoted at 131 bid, 131¼ offered, while the 7 1/8% Brazilian government bonds due 2019 added 1/8 point to 101 5/8 bid, 102 3/8 offered.

Asia 'still firm'

Asia traded well although volumes began to trail off, a trader said.

"It's still firm, but it's quieted down," he said. "The summer is setting in."

Sri Lanka completed an investor roadshow on Tuesday, but was trading well after the International Monetary Fund announced the island would receive a 20-month SDR 1.65 billion ($2.5 billion) standby loan on Monday.

The Sri Lankan 8¼% bonds were seen near 95 bid.

"The end of the conflict provides Sri Lanka with a unique opportunity to undertake economic reform and reconstruction, which would be key to laying the basis for higher economic growth in the years ahead," said IMF managing director Dominique Strauss-Kahn.

Elsewhere, Indonesia's new samurai bonds which priced at par to yield 2.73% was a creature just of Japanese retail, the trader said, but the major liquid sovereigns were not really affected by either the new supply or last Friday's bombings.

The previous rally has cooled, he said, but it is mostly "consolidating gains."

The bonds were "a little bit tighter relative to IG-land," he said.

The Indonesian bonds due 2019 were flat at 131 bid, 131¼ offered.

In the Philippines, recent poor data had "not much impact" on investors, but the bonds.

The Philippine sovereigns due 2030 were spotted at 123¼ bid, 124¼ offered.

Digesting well in Asia

Meanwhile, the supply digestion has gone so well, "the market is anticipating more," the trader said.

Korea National Oil Corp. will complete an investor roadshow on Wednesday (A2//).

"I'm not even sure a deal is necessarily going to happen," a market source said.

Still, if there is a deal "it should be soon, I think," a trader said.

The company announced plans for a five-year bond earlier in the month.

Either way, "if there is more supply, it will be welcome if anything," he said.

Asian Development Bank, Bank of America Merrill Lynch, Barclays Capital, BNP Paribas, Deutsche Bank and Korea Development Bank will act as bookrunners for the deal.

Korea National Oil is an Anyang, South Korea-based energy firm.

Korea Electric Power Corp., which priced 5½% five-year bonds on July 13 at Treasuries plus 355 bps, has been "absolutely crazy," the trader said, adding that "some guys shorted it and got caught."

The bonds have been as tight as 70 bps better than the pricing spread.

Tuesday the Kepco bonds were seen trading at 290 bps bid, 280 bps offered.

Similarly South Korea's bonds have performed well, but not nearly as well as Kepco.

The nation's bonds due 2014 were about 30 bps tighter over the last two or three sessions, he said, and were quoted at 242 bps bid, 232 bps offered Tuesday.

There will be continued supply, even into August, "as and when it comes," the trader said.

China's Hong Kong Mortgage Co. Ltd. was also believed to be considering a deal, he added.

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