Emerging markets hold on; follow U.S. sideways; KazMunaiGaz prices retap; spreads wider

By Aaron Hochman-Zimmerman

New York, July 28 - Emerging markets spent most of the day futilely following the United States to a mixed close.

The positive element for emerging markets was that recent issues largely held their gains very well and the market seemed ready to take on further issuance with enthusiasm.

Kazakhstan's KazMunaiGaz priced a $250 million retap which had the hallmarks of a reverse inquiry, while Malaysia's Petroliam Nasional Bhd. announced it will roadshow a five-year sukuk and a 10-year conventional bond, both in dollars.

In trading, new bonds still held the spotlight along with Latin American high-betas even as the overall market was tied to market fortunes in the United States.

The new euro-denominated bonds from Russia's OAO Gazprom were seen hanging tightly to the 4 point gains they registered after pricing at par last Wednesday.

One trader was on the fence over whether it is best to "sell now, or it just carries on," he said about the rally.

As to the chances of the rally carrying on, "I have no idea," he said, but even if it does keep going in the near term, before too long, "it will end up in tears."

Still, the next thing to significantly move the market will be the U.S. GDP number due on Friday, said Enrique Alvarez, a Latin America debt strategist at think tank IDEAglobal.

Good news will likely help more than bad news will hurt, he said, but "I doubt the market will remain very still."

From the major markets on Tuesday, a generally flat day for equities kicked volatility up by 0.73 to 25.01, according to the VIX index. The index is a common measure of market volatility.

As a sector, emerging markets was hitched to the United States and widened by 6 basis points to a spread of 384 bps, according to JPMorgan's EMBI+ index. The EMBI+ estimates the amount of extra yield investors will demand to hold assets in emerging market debt.

Oil firms produce paper

In emerging Europe, KazMunaiGaz priced a $250 million reopening of its senior unsecured 11¾% bonds (Baa2/BB+/BBB-) due 2015 at a 102 level.

Citigroup and JPMorgan acted as bookrunners for the deal which closed very shortly after books opened.

The original $1.25 billion bonds were priced on July 17 at 99.014 to yield 12%.

Proceeds from the add on, which, like the original came through KazMunaiGaz Finance Sub BV, will be used for general budgetary purposes and to refinance debt.

KazMunaiGaz is an Astana, Kazakhstan-based government-run energy firm.

The books closed on the sale in "if not seconds, then minutes," said a trader who was convinced the deal came as a reverse inquiry.

"It was done before it started," he said.

Meanwhile in Asia, Petroliam Nasional will roadshow a dollar-denominated five-year sukuk and a 10-year conventional bond (A1/A-/).

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

Petronas is a Kuala Lumpur-based government-run oil firm.

If the Asia sector continues to devour new paper the way it has, this issue will be "pretty welcome," a trader said.

"I'm not convinced why they need to do the whole roadshow," he said, especially for a company which has under-issued in the past, such as Petronas.

This may be their first dollar-denominated issue in seven years, he reckoned.

Asia cycles tighter

Also in Asia, South Korea's Woori Bank came off its tights, but had still narrowed drastically by 50 bps since pricing $800 million at Treasuries plus 450 bps on Monday.

The new bonds had been as much as 65 bps better than pricing, but have settled at 400 bps bid, 395 bps offered.

"Every time a deal comes, it just highlights how much demand there is out there," a trader said.

In South Korea, the sovereigns were unfazed by the new supply.

The South Korean bonds due 2014 were seen at 225 bps bid, 215 bps offered.

There has been nothing but more buying and more follow-through in an almost "cyclical" fashion, the trader said, particularly for high-grade paper.

Another high-grade name, Hong Kong Mortgage Corp., has tightened 15 bps since pricing $1 billion at Treasuries plus 110 bps on July 24.

The bonds were seen at 95 bps bid, 90 bps offered on Tuesday.

Elsewhere in Asia, Indonesia president Susilo Bambang Yudhoyono will make known the 2010 budget in a speech on Monday, Aug.3, said state secretary Hatta Radiasa, according to the Jakarta Post.

For the budget, "the government has set five priority programs, namely enhancement of economic growth and people's welfare, establishment of a clean and authorized government, strengthening democracy and human rights promotion, law enforcement and corruption eradication, and development for all," Hatta said.

The Indonesian government bonds due 2019 fell ½ point to 130 bid, 130¾ offered.

The Philippines kept pace by dropping ¼ point from its sovereign bonds due 2030 to trade at 123¾ bid, 124¾ offered.

In India, the central bank held rates unchanged at 4¾% over inflation concerns.

The halt in rate cuts follows sharp reductions over the last six months which brought on the increasing inflationary fears.

The bank also maintained its current projection for economic growth at 6%.

The rupee was seen trading at 48.225 to the dollar.

Finally in Pakistan, the bonds due 2017 continued to hold recent stability and were quoted at 70 bid, 74 offered.

Emerging Europe 'cooking with gas'

Emerging Europe traded at a calm pace as "it feels as lots of people are still away," a London-based trader said.

However, the movements of many issues have been "eye watering," he said.

The bonds which were issued into the current rally are just "cooking with gas," he said, particularly Gazprom's new 8 1/8% euro-denominated bonds.

They bonds which priced at par July 22 held their value at 104 bid, 104¼ offered.

The 8 1/8% dollar-denominated bonds remained comfortably above their reoffer price of par, but stepped back 2 points on Tuesday to 101 3/8 bid, 101 5/8 offered.

The euro-denominated bonds tend to do better with strictly European accounts, the trader said.

The securities go "off into Europe, never to be seen again," he said.

The disparity in performance is "more technicals than anything else," he said.

Also in Russia, the banking sector looked strong.

The Russian Agricultural Bank bonds which priced at par on June 4 were quoted at 106¼ bid, 106¾ offered.

The Russian sovereign bonds due 2030 added 3/8 point to 100 3/8 bid, 100 5/8 offered.

Some of the only bonds in the sector which have not performed well are the 5.888% Dolphin Energy Ltd. bonds due 2019 which priced at par on July 23.

The trader could not pin down the reason the bonds seem to have skipped the rally to hang just below their issue price at 99½ bid, 99¾ offered.

Meanwhile, the International Monetary Fund announced that it reached a SDR 178 million ($278.3 million) standby agreement with Latvia.

"It will also ensure that Latvia can continue to meet its international payment obligations and provide resources, as needed, to support the financial system," the IMF said in a statement.

The lat was seen trading at 0.494 to the dollar.

Also in emerging Europe, Turkey's government bonds due 2030 were quoted at 155¾ bid, 156¼ offered.

Venezuela leads LatAm

Latin America traded moderately, but with a narrow focus on the high-betas, IDEAglobal's Alvarez said.

The high-beta rally which opened the week, "took one additional step to the topside," he said, while the core credits were on the sidelines, "sliding sideways," he said.

In Venezuela, the government secured a $4 billion loan from Russia's Gazprombank for mineral projects, reports said.

Few details escaped about what sort of mineral projects the sides would undertake, but for that amount of money, "they must be onto something," Alvarez said.

Russia deputy prime minister Igor Sechin met with president Hugo Chavez to finalize a series of economic agreements including an oil services partnership between Gazprom and Venezuela's PDVSA.

Recent newswire stories about PDVSA "falling behind on salaries" have faded, said Alvarez, and did not seem to spook the Russians.

Still, the issue is not likely completely settled.

In addition to the loan, the two countries also signed deals to strengthen their military ties.

The 9¼% Venezuelan sovereigns due 2027 added 1 point to 69 bid, 69¾ offered.

Meanwhile, Argentina slipped slightly off Monday's rally, but the move was not likely instigated by the rumors that the provinces would have to issue debt in order to replace shortcomings of federal subsidies.

The new issues from the provinces are not likely to influence the global market or even the sovereign, Alvarez said, but it will be interesting "just to see" how well they perform.

The 8.28% Argentine discount bonds due 2033 fell ½ point to 57 bid, 58½ offered.

Also in Latin America, away from the high-betas, Brazil's 7 1/8% government bonds due 2019 fell 0.2 point to 101 bid, 101.8 offered.

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