Pre-holiday issuance almost nil; secondary quiet; inflows top $1 billion; Sberbank prices

By Christine Van Dusen

Atlanta, Oct. 8 - The new deal pipeline on Friday stopped its steady drip - with Russia's Sberbank alone in pricing notes - as emerging market investors did some buying and kept inflows high. Volumes, however, stayed light on a day marked by weaker-than-expected jobs numbers from the United States.

"There's been a lot of buying today," a Connecticut-based trader said. "We've been seeing stocks breaking out of the recent range for the last couple of weeks and Treasuries continuing to be pretty well bid, and so we're seeing quite a bit of demand."

Inflows, he said, "continue to be brisk."

Indeed, the week ending Oct. 6 was the 19th consecutive week for inflows into emerging market bond funds, according to data tracker EPFR Global.

The total amount broke the $1 billion mark for the third consecutive week.

"Among the sub-groups, emerging Asia bond funds took in fresh money for the 17th week in a row as they remain on course for a record-setting year thanks to the combination of strong growth, sound public finances and appreciating currencies offered by many of the region's key markets," EPFR said in its report.

Said the Connecticut trader: "We're seeing a considerable amount of demand for emerging market product across the board."

EM assets seem safe

Investors remain "very upbeat on EM's superior fundamentals and the growth outlook vs. the developed world," according to a report from RBC Capital Markets.

The U.S. Labor Department's report on nonfarm payrolls for September showed a 95,000 drop and the unemployment rate was unchanged at 9.6%. This worse-than-expected news raises the likelihood that the Federal Reserve will institute further quantitative easing, further bolstering the "still-flush global liquidity backdrop" and likely pushing even more private capital into emerging market assets, the report said.

Though EM assets are taking on more of this "safe-haven" status, risks remain, RBC cautioned.

Investors should be cognizant that some EM names may be leaving stimulating policies in place too long, triggering asset bubbles while also "adopting capital controls or other protectionist measures," the report said.

Asia and Latin America look "more vulnerable in this regard than EMEA, as they have seen a much more substantial capital inflow surge," RBC said.

Mexico remains hot

The big success of the week was Mexico's century bond, a $1 billion issue of 5¾% notes due 2110, which priced this week at 94.276 to yield 6.1%, or Treasuries plus 235 basis points.

As of Friday afternoon, "it crossed par," the Connecticut trader said. "That's finishing up 6 points on the week. Most of it was in the first 12 hours after the deal was free to trade. There's just very strong demand from institutional money."

This suggests that there's some optimism in the market that Treasuries will continue to be well bid.

"It's a very bullish signal," the trader said. "You have to feel pretty confident about the direction of the market to see such overwhelming support for a 100-year product."

Now other issuers, like Brazil, are said to be considering century bonds of their own.

"In the past it has been a harbinger for the top of the market," a source said. "People now have bought into this whole idea that fixed income is going to continue to roll on here, so they're buying the longest durations they can."

Sberbank prints notes

But on Friday, the primary was mostly silent, with news only from lender Sberbank, which priced a $250 million tap of its $1 billion 5.4% notes to yield 5¼% via Barclays, BNP Paribas and ING, a market source said.

Market-watchers were also talking about a possible euro-denominated deal due 2011 from the Russia sovereign, as well as a dollar bond from Ukraine-based egg producer Avangard Group via JPMorgan and Troika Dialog in a Regulation S transaction.

"It's a little slower in terms of new issuance," he said. "It's a quiet, pre-holiday Friday."

Some recent issues were performing well, including the new €2 billion 4.35% notes due Oct. 14, 2025 from the Slovak Republic that priced at 99.751 to yield 4.373%, or mid-swaps plus 150 bps.

And QTel International Finance Ltd.'s $1.5 billion issue of notes - with $500 million 3 3/8% notes due 2016 pricing at 99.243 to yield 3.516% and $1 billion 4¾% notes due 2020 pricing at 99.161 to yield 4.855% - was "very active," the source said.

Argentina, Ivory Coast outperform

Also getting attention on Friday was Argentina and its 8¾% notes due 2017, which priced in June at 90.11. The bonds were up 2½ points on the day, closing at 101.5, a market source said.

Meanwhile Venezuela's 2027 bonds were up about 2½ points over the last several days.

"There's been strong buying across the curve and people reaching for yield," the trader said.

Also performing well on Friday was the Ivory Coast, which had been shunned due to pre-election turmoil and supply overhang related to a swap of defaulted Brady bonds for a $2.3 billion global bond due 2032.

"They were trading at 57 and now they're at 63, up 6 points in the last two weeks as real money has swallowed up all the loose supply," a source said.

Volumes stay light

Trading volumes, though, remained fairly thin on Friday.

"They're lighter than prior years but busier than August and September," the trader said.

"A few" investors are currently selling in order to make room for the new corporate issues, and some others are rotating out of BBB names that are at the tights of the year, he said. "But that's it."

A client was looking to buy Vietnam's 2020 bonds and "one of our main holders said, 'I'm literally not allowed to sell anything, because there's nothing comparable to buy in that area,'" the trader said.

"They couldn't find any Southeast Asian dollar-denominated debt that has any type of yield that is nearly as attractive," he said. "Vietnam is trading in the low 6% area."

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