Market jitters slow primary market, hinder trading; Vimpelcom active; Serbia taps dealers

By Christine Van Dusen

Atlanta, Sept. 9 - Emerging markets investors were nervous and issuers quiet on Friday amid continuing concern about the global economy and new worries about terrorism to mark the upcoming 10th anniversary of the Sept. 11 attacks in New York City, Washington and Pennsylvania.

"There's definitely some additional cautiousness because of the alerts in New York," a Connecticut-based trader said. "Everyone is trying to play it safe until we get to the other side of the anniversary."

Debt spreads mostly held steady, with the JPMorgan Emerging Markets Bond Index Plus spread starting the session 1 basis point wider at Treasuries plus 344 bps.

"It's a new dawn, a new day but no new trades to see," a London-based trader said. "In keeping with the rest of the week, EM is holding firm but still with very limited interest."

Said another trader, "Emerging markets are having a little bout of weakness. A selection of cash bonds is being hit in the Street."

Among the few movers were Russia's Vimpelcom and its 2022s, which fell ¾ of a point to 94.5 on Friday.

"The magnitudes of the moves elsewhere are less, but nearly all weaker," he said. "In fact, the only thing to go up today, aside from U.S. Treasuries, is the KazMunaiGaz curve, which has rallied 5 to 10 bps."

Indeed, KazMunaiGaz was outperforming the Gazprom curve on Friday, he said.

BTA gives back gains

The boost given on Thursday to Kazakhstan-based BTA Bank "proved to be too good to be true," he said, "with the bonds straight back to 60."

But most cash bonds were unchanged on Friday, the London trader said.

"Early inquiry has been small buying, mostly in the Middle East and North Africa," he said.

Banks from Turkey also remained in focus on Friday as the expectation of a reserves reduction attracted investor attention. The sector tightened 15 bps on the week in response, he said.

One laggard was Ukraine.

Kipco sees two-way action

Though there was a bit of a "wobble" into the close, there was no significant selling pressure, a trader said.

"Overall it was a quiet session with limited activity," he said.

He did note some two-way activity for Kuwait-based Kipco's 2020 notes, which closed at 109.25 bid, 109.75 offered. And solid buyers were seen for Qatar's Qtel International and its 2025 notes, which traded above 101.

Sellers were seen for International Petroleum Investment Co. and retail two-way action for Abu Dhabi National Energy Co.

"I still think HSBC Bank Middle East's 2015s look OK," he said. "And there are buyers around on Sharjah Islamic Bank, Qatar Islamic Bank and Saudi Arabia names."

MENA short on supply

The 2016 notes from First Gulf Bank remained at 101.62 bid, 101.87 offered, a trader said.

And looking to Africa, the 2016 notes from African Export-Import Bank (Afreximbank) opened at 100.05 bid, 100.35 offered after pricing at par.

"Afrexim is still looking OK versus its peer group," he said.

There's still no sign of any supply from the region, he said.

"I would suspect some deals are being readied," he said. "However, a combination of cautious investors, a worrying backdrop and discussions over new issue premiums are probably a hurdle."

Chile notes widen

The Connecticut-based trader was keeping an eye on the recent issue of 10-year dollar notes from the Republic of Chile. The $1 billion 3¼% notes due 2021 priced at 99.131 to yield Treasuries plus 130 bps on Thursday.

"Chile has traditionally been one of the sturdiest credits you could find because of the tax benefit for locals and the scarcity of paper, which a lot of real-money guys use for diversification purposes," he said. "This issue was initially well received but is now widening pretty nicely, about 10 or 12 bps wider. It didn't come particularly cheap. But at the same time it's a reflection of the nervousness - there wasn't time to digest this deal before nervousness set into the market."

Similarly, the recent issue of notes from Mexico-based telecommunications company America Movil SAB de CV performed well earlier in the week but experienced palpable softness by Friday.

The company priced CHF 270 million 2% notes due 2017 at 99.776 to yield. 2.039%, or mid-swaps plus 86 bps, on Aug. 30 via Credit Suisse.

"It's wider by about 12 or 15 bps off the tights with better sellers," he said. "That's another name that's usually quite sturdy and is starting to see some widening out."

Some euro selling

In general, emerging markets assets didn't see a lot of selling on Friday, the Connecticut trader said.

"We've seen a little selling of euro paper over the last four or five days, with Pemex euro paper and Mexico euro paper and Hungary and some Lithuania," he said. "I think a few people are anticipating there might be more ongoing euro weakness so they're reducing euro exposure through sovereign bond issues."

Most of the day's activity was focused on buying longer-duration paper, he said.

"We've seen a lot of accounts looking to do curve-flattening trades, selling 10-year Mexico to buy long - same thing in Colombia and the Middle East. And the Street is very lean and carrying very little inventory at the moment."

A lot more selling will have to transpire in order for the market to move significantly wider, another trader said.

"There are still plenty of technical bonds out there with dealers caught short," he said. "Locals, for the most part, remain flush with cash."

Serbia ahead

In deal-related news, Serbia has mandated Deutsche Bank and JPMorgan as the bookrunners for a $1 billion offering of notes that is expected to come to the market before the end of the year, a market source said.

"The new Serbia deal is starting to get some focus, with the chance to finally take vanilla exposure to this name," a trader said. "A first look suggests it could be Libor plus 475 basis points if it is a dollar 10-year issue."

Other new deals are expected to trickle in over the next few weeks, market sources said.

"I don't think there will be a torrent of new deals, but [there] may be a steady one or two a week, or two to five a week," the Connecticut trader said.

Caution urged

Some anxiety has lessened, but investors are wise to maintain a cautious stance, according to a report from Barclays Capital.

"The message emerging from advanced economy policymakers and recent key decisions suggests that chances for more coordinated, better articulated policies are increasing," the report said. "In turn, EM policymakers, particularly central banks, have taken pre-emptive actions interrupting hiking cycles and, in many cases, adopting a dovish stance."

More central banks are expected to join Turkey and Brazil in cutting rates, Barclays said.

"We remain cautious in our risk-taking stance and continue to recommend holding local long bonds, despite the recent rally," the report said.

Inflows rise

In other news, emerging markets bond funds saw $684 million of inflows for the week ended Sept. 7, according to a report from data tracker EPFR Global.

That compares to $87 million of inflows reported during the previous week.

"Among the trends that we are hearing about that have some bearing is a rotation out of emerging Asian equity into regional debt and the expectations of another quantitative easing program - or something close to it - in the U.S. that will probably finance another slide in the value of the dollar," said Cameron Brandt, senior analyst with EPFR Global.

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