Risk sentiment improves; America Movil prices bonds in three tranches; market tone firms

By Christine Van Dusen

Atlanta, June 17 - After so many weeks of volatility that paralyzed the primary and slowed trading in the secondary, emerging markets on Thursday continued their slow tiptoe back to stability with one new issue and a general feeling that the picture is brightening.

"Generally speaking, it is definitely improving," a market source said. "Liquidity is starting to return. It feels better. People are putting cash to work. Appetite for risk is increasing.

"I don't want to get too excited, but I think in the next week we may see more deals start to print."

America Movil prices

One new issue did print on Thursday.

Mexico-based telecommunications company America Movil priced a three-tranche euro- and sterling-denominated offering, a market source said.

The deal included €1 billion 3¾% notes due 2017 at 99.276 to yield 3.87%, or mid-swaps plus 135 basis points; €750 million 4¾% notes due 2022 at 98.902 to yield 4.873%, or mid-swaps plus 175 bps; and ₤650 million 5¾% notes due 2030 at 99.003 to yield 5.836%, or Gilts plus 165 bps.

In the Securities and Exchange Commission-registered deal, Deutsche Bank and HSBC were the bookrunners for all the notes and BNP Paribas was involved in the euro notes only.

Proceeds will be used for general corporate purposes, according to a company filing.

"I don't expect much out of it, frankly," a New York-based market source said. "It was bold of them to issue in those currencies. But I guess there's demand for it."

MTS does well

America Movil joined a very short list of recent new issues. Also on that list is the $750 million 8 5/8% loan participation notes due 2020 from Russia-based Mobile Telesystems OJSC that priced Wednesday at par to yield 8 5/8%, or Treasuries plus 531.7 bps.

"MTS did extraordinarily well" on Thursday, a market source said. "That went up about 2 basis points."

A Zurich-based trader agreed that MTS' bond was placed "successfully. Now the market could reopen for other issuers," he said. "But still it's a bit of a nervous story."

Indeed, investors' nerves were a bit jangled Thursday on news that U.S. consumer prices fell 0.2% - the most since the end of 2008 - and jobless claims climbed an unexpected 12,000 to 472,000 for the week ended June 12.

Investors responded by seeking out lower-risk assets. Yields on 10-year Treasuries dropped as much as 6 bps by midday, a market source said.

Calming some fears on Thursday was Spain's successful sale of €3.5 billion of bonds, which suggested that the sovereign's financial situation isn't quite as bad as feared and that the European economic crisis may not be spreading as fast as initially expected.

Market firm

Spain's sale, in addition to a big cash build-up for investors, helped keep the market "incredibly firm" on Thursday, the New York-based market source said. "It has shrugged off any piece of bad news."

Since May, "there's been almost zero new issuance, pretty much, and cash has kind of built up on the sidelines," he said. "Guys are putting their money to work, and there's no new issuance to sop it up."

Even the faintest hint of stability has "been met with buying," he said. "Liquidity reigns supreme for now. Cash has built up because of the uncertain environment."

He pointed to Brazil's 2037 benchmark bond. "It was trading at 1151/2, mid-market," he said. "It's now 1173/4. Those are the kinds of moves we're seeing a lot of."

Risky assets a good bet

Overall, emerging markets are doing pretty well in light of economic turmoil in the eurozone, according to the global investment team for DB Advisors, which held a conference call on Thursday.

"The global recovery is still intact," said Georg Schuh, chief investment officer for Europe for DB Advisors. "Certainly this is mainly due to EM."

While May was a "bad month for risky assets," the current environment is "very good," he said, "because we can expect a zero-return environment for money market investments for many months to come. If you don't get a decent reward on your risk-free money market assets, there will be a hunt for yield."

So emerging market bonds "most likely should do fine in this environment," he said.

Emerging market issuers that look promising include Malaysia, Poland, Indonesia and Turkey, said Nicolas Schlotthauer, head of emerging debt for DB Advisors, during the conference call.

These kinds of sovereigns were able to avoid slipping into recession during previous economic downturns, and this time they've "saved in the good days for potential rainy days to come," he said.

This "sound fiscal policy," along with "low public debt levels," allows many emerging economies to weather market shocks, he said.

But what investors should keep an eye out for, he said, is what happens in European countries like Germany, France, Italy and Spain, and whether there appears to be a kind of "fiscal union," Schuh said. "If this is not achieved, then the markets will again question the sustainability of the eurozone. And we do think that the risks are very high."

The eurozone's issues "will be in the headlines for several quarters in the year to come," Schuh said. "It certainly deserves a risk premium. The medium-term outlook for the euro is on the negative side."

All of this could have a trickle-down effect and hit emerging economies. But at this point the markets are "pricing in the high probability of the break-up of the eurozone," he said.

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