Emerging market debt trades flat to lower; Peru sells $750 million 20-year bonds

By Reshmi Basu and Paul A. Harris

New York, July 13 - Emerging market traded flat to lower Wednesday, as U.S. Treasury prices fell for the fourth straight day.

During the session, the Brazil C bond slipped 1/8 of a point to 101¼ bid while the bond due 2040 slid 0.30 to 118¾ bid. The Russia bond due 2030 added 0.003 to 111.06 bid. The Turkey bond due 2030 lost ¼ of a point to 142½ bid.

But the Philippines shrugged off adverse comments from Moody's Investors Service.

The rating agency cut its outlook on the Philippines' sovereign B1 rating to negative from stable, citing the possibility of negative consequences from the country's political problems.

During the session, the Philippine bond due 2025 gained a quarter of a point to 110 bid.

Peru sells $750 million

In the primary market, the Republic of Peru sold $750 million of 20-year bonds Ba3/BB/BB) at par to yield 7.35%.

The tenor on the new issue helps fill out the curve, said sources.

JP Morgan and UBS Investment Bank ran the Rule 144A/Regulation S issue

"The macroeconomic environment has improved," said a Latin America debt strategist at Refco EM.

"The country has solid fundamentals. The only hiccup is the political situation, but it seems to be under control today [Wednesday]," he said.

"I'm not surprised that the issue went well."

He added that earlier in the day the new 2025 bond was trading a ¼ of a point higher in the gray market.

The Peru sovereign deal priced a day after the Republic of Colombia retapped its 8¼% global bonds due 2014 (Ba2/BB/BB) to add $500 million via Goldman Sachs and Merrill Lynch. It priced at 106 5/8.

In the secondary, the Colombia 2014 bond was quoted unchanged from its Tuesday close at 107 bid, according to a trader.

Also Wednesday, Brazilian steel maker Companhia Siderurgica Nacional SA announced plans to reopen its 9½% perpetual preferred shares (B1/BB-/BB-) to add between $100 million and $150 million.

Price talk has been set at 100. Pricing is expected Thursday morning.

The original $500 million deal priced on July 7 after being massively upsized from a planned $150 million amid huge demand.

Credit Suisse First Boston and Deutsche Bank Securities are joint bookrunners for the Rule 144A/Regulation S reopening.

All of this new paper "shows how liquid the market," said the strategist, adding that investors are looking for yield in Latin America.

EM flat to lower

Overall, emerging markets debt slid slightly Wednesday after reaching an all-time spread low on the JP Morgan EMBI+ Index. On Tuesday, the EMBI+ Index closed 9 basis points tighter at Treasuries plus 291 basis points. On Wednesday, the index widened one basis point to 292 basis points.

The recent spread compression is driven by technicals, according to an emerging market analyst.

"On the fundamental side, there are plenty of dark clouds," he said.

"Brazil is stuck in a debilitating political crisis, the Philippines is on the verge of a coup, Turkey's trade and current account deficits keep getting larger, and the E.U. accession outlook of all the E.U. candidates is uncertain.

"But with 10-year Treasury rates still low - even if they're not quite as low as they were a few weeks ago - flows will continue to pour into the market," he added.

On the other hand, the debt strategist sees both fundamentals and technicals driving the market higher.

"On the technical side, you have a very low yield environment worldwide," he noted.

"And you have the option of investing in a region that has improved its fundamentals and has shown that it is committed to macro fiscal discipline."

He added that the Latin American region continues to post strong growth in commodity exports.

Furthermore, Latin America is offering investors higher yields than Europe, Asia or the United States, he added.

And he would not be surprised if spreads tighten further for the region.

However, the strategist was struck by how well the Brazilian market was able to absorb such shocks as the "bribes for votes" scandal, which dogged president Luiz Inacio Lula da Silva's administration. He was also surprised how the rest of Latin America as well as other emerging markets avoided a broad market correction.

Meanwhile, the strategist was slightly skeptical about Lula's rising popularity,

The approval rating for his government increased to 40.3% in July from 39.8% in May, according to Tuesday poll by the Sensus Institute for the National Transport Confederation.

"I question the timing of the release of that survey. It could be politically inclined," he said.

On the other hand, "damage control has been well done. He did not show a commitment to members of his party who were accused."

Looking ahead, the strategist remarked that it is still too early to tell if Lula's re-election chances have been impacted by the scandal.

Judging from the survey, he still has the support from the people for now, he added.

Asia's new issues

In Asia, a source said that new issues have been giving support to the secondary market.

During Wednesday's session, Hong Kong's PCCW-HKTC Telephone Ltd. priced $500 million of 10-year bonds (Baa2/BBB) at 99.142 to yield 5.362% or a spread of Treasuries plus 120 basis points.

HSBC was the lead manager for the Rule 144A/Regulation S issue.

Export-Import Bank of China lowered price guidance for a $1 billion offering of 10-year senior fixed-rate notes (A2/BBB+) to Treasuries plus 85 to 87 basis points from 87 to 92 basis points.

Pricing is expected on Thursday.

BNP Paribas, Citigroup, HSBC, and Merrill Lynch & Co. are joint lead managers and joint bookrunners. Bank of China International and Goldman Sachs are also acting as joint lead managers.

The book is more than four times oversubscribed, said sources.

And out of Russia, natural gas giant OAO Gazprom set price guidance for a two-part offering of $1.9 billion in eurobonds.

Pricing is expected Friday morning.

The offer includes $640 million of amortizing notes due July 2013 with a 3.8-year average life. Price guidance has been set at 137½ basis points more than asset swaps, according to a market source. Another source said guidance was 5.70%.

Deutsche Bank is the bookrunner for the Rule 144A/Regulation S notes.

The second portion is a $1.222 billion deal, which will be guaranteed by Italy's credit export agency SACE SpA.

Guidance on this Regulation S deal is 4.30%.

And finally, another market source said that Industry & Construction Bank of St. Petersburg's offering of short-dated dollar bonds will likely price in the high 7% yield range.

The bank has mandated ABN Amro and Deutsche Bank.

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