Risk aversion returns on U.S., China economic news; secondary trading mixed; Akbank prices

By Christine Van Dusen

Atlanta, July 15 - Risk aversion crept back in on Thursday amid weak economic reports from the United States and China, renewing old anxiety about the global recession and slowing the flow of new emerging market bond deals.

Investors focused on safe haven assets, and yields on 10-year Treasuries fell.

"The market's a little bit more fragile than it has been in the past," an emerging markets strategist said.

Secondary mixed

Still, some issues traded strongly on Thursday, most notably the $750 million 8 5/8% loan participation notes due 2020 from Russia's Mobile Telesystems OJSC, which priced last month at par to yield Treasuries plus 531.7 basis points. "They are up 8 points," a New York-based trader said.

The $1 billion 6½% 10-year notes from Brazil's Companhia Siderurgica Nacional (CSN) that priced Wednesday at 99.096 to yield 6 5/8%, or Treasuries plus 357.7 bps, "held in well," the trader said.

It's true that "the Treasury rally benefited bond prices," the strategist said. But left out in the cold were "those issued more recently."

He pointed to the $300 million 9¼% notes due 2020 from Brazil's Gol Linhas Aereas Inteligentes SA, which priced Tuesday at 99.409 to yield 9½%, or Treasuries plus 638.5 bps. "That was down a bit today, about 1/4," he said.

And the $200 million 9 5/8% notes due 2015 from Brazil's Banco Mercantil do Brasil SA, which priced last week at par, were also "down about a quarter point," he said. "It's not that much, but it still looks as though the market is taking a step back."

U.S., China cause concern

The pause comes as a result of negative economic news from the United States - producer prices fell again and manufacturing growth slowed in New York and Philadelphia - and reports that China's gross domestic product grew at a slower-than-expected rate in the second quarter.

The China news "suggests that maybe a second-half slowdown, which everyone had been anticipating, might be a little bit slower than what everyone thought," a market source said.

In response to this and uncertainty about the upcoming results from stress tests at Europe's banks, there may be "a little profit-taking," he said. "Some bad news needs to be factored in. The market had rallied so much in the past two weeks."

The trader was seeing "profit takers and flippers" in the morning and mid-afternoon on Thursday. But by the end of the day "there were buyers found across most new credits as they closed unchanged," he said.

Market digests supply

In general, though, it looked like the market was preparing to "pause," the strategist said. Time is needed to digest the "slew of new issuance" seen in recent days, he said. "There was about $5.6 billion-worth just yesterday."

The pace of new issuance so far this week has been "borderline staggering," the New York-based trader said. And it proves that "the recently parked money on the sidelines was waiting for this thick and ever-flowing pipeline."

This leaves market-watchers with high expectations for the days to come, he said. "The new issue market still seems plentiful. New money is still looking for EM exposure."

But, he cautioned, investors should consider that things may be "fast approaching a point where we are unable to digest too much more new supply in the short term."

New issuance slows

Thursday saw just one new deal. Turkey-based banking company Akbank TAS priced $1 billion 5 1/8% notes due 2015 at 99.431 to yield 5.256%, or Treasuries plus 350 bps, an informed source said.

Bank of America Merrill Lynch, Citi, JPMorgan and Standard Chartered were the bookrunners for the Rule 144A deal.

Proceeds will be used for general corporate purposes.

The pace in the primary market could pick up again soon, the strategist said. "I think a few things could come out next week."

On that list are eurobonds from Belarus, the long-awaited pricing of Argentina-based real estate company Irsa Inversiones y Representaciones' $250 million 10-year notes, and lender Bancolombia's planned subordinated notes totaling as much as $636 million due 2020.

The week also could see Ukraine bring an issue of eurobond notes to market as the sovereign pays its exporters, a step the government must take before it can be approved for a $14.9 billion loan from the International Monetary Fund.

Meanwhile, market-watchers are whispering that Indonesia could step away from the international bond market this year and Nigeria, the Reserve Bank of India and Kuala Lumpur's Cagamas Bhd. could step toward it with new deals.

Inflows rise

Inflows into emerging market bond funds totaled $745.4 million for the week ending July 14, according to data tracker EPFR Global. It was the strongest week in the last five.

Local currency funds took in $285 million while hard currency funds saw inflows of $278 million and blended funds saw $182 million.

Last week, emerging market bond funds saw inflows of $740.1 million. And year-to-date, the funds have taken in $18.6 billion, a new record.

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