Primary quiet as stability proves elusive; Hungary situation improves; MTS monitors market

By Christine Van Dusen

Atlanta, June 8 - The glimpses of stability seen on Tuesday were not enough to inspire emerging market issuers to bring new deals and did not do much to improve investors' risk tolerance, so the primary remained paralyzed and market-watchers maintained a wait-and-see posture.

"There's not really much going on," an economic strategist said.

A London-based trader said "It's been a choppy afternoon."

Coloring the tone was news out of Hungary and the United Kingdom.

On Tuesday Hungary - which recently compared its financial situation to that of Greece, and sent markets into a tizzy - put forth a fiscal plan that includes tax changes and wage and benefit cuts.

"New York closed yesterday very weak with equities, and bond markets were the same," the London trader said. Then, noting news out of Hungary and a strong rally in Asia, the trader said Tuesday's market activity improved.

"The S&P was up about 1% from where it closed. My world opened up very strong on the back of that," the trader said.

Asia was "pretty strong in the early session" on Tuesday, but that "turned around and unwound completely with Fitch making its comment about the U.K."

U.K. rating in question

Fitch Ratings on Tuesday said that the United Kingdom is facing significant fiscal challenges and risks losing its high credit rating if it doesn't quickly address its budget deficit, which is rising faster than similarly rated countries and is nearly double that seen during previous economic downturns.

"So we lost all the gains and are back to where we came from," the London trader said.

Meanwhile, Treasury yields rose Tuesday after the auction of three-year notes was met with solid buying interest. About $36 billion was sold at 1.22%, the lowest yield since the start of 2009.

"The demand was particularly good, though the market cheapened up going into the auction," the economic strategist said. "But that's par for the course these days. It's very tough to be surprised by a strong Treasury auction."

Choppy in secondary

Overall in trading, it was "pretty weak" and then briefly "rallied through the Treasuries," the London trader said. "If you look at the S&P since midnight, it tells you everything. All those moves have been mirrored exactly in bonds."

He pointed to Russia's benchmark 30-year bonds as a prime example. The bonds closed Monday at "110, then traded up at 110¼ this morning, then went back to 110 3/8 and are now trading at 1103/4," he said as the European close neared. "That's how it's been with everything I trade. And whether it's traded or not, that's been the sentiment behind the prices."

Primary still silent

On the new issuance front, it was the same old refrain: No new deals.

"There's still no new issuance," the London trader said. "It's all quiet on that front. I think it's going to remain as it has been. The world's a pretty perilous place."

A New York-based market source concurred. "The new issue market remains silent."

Among the deals that remain on pause is the planned 10-year eurobond issue from Russia-based mobile phone company Mobile Telesystems. Some say the company could decide the fate of the deal in the next two weeks, but a source close to the deal hadn't heard that and said MTS was continuing to "monitor market conditions."

The market just needs a period of a few days without volatility in order for the new issuance pipeline to open up, the New York-based source said.

"I would expect that a few days of stability would lead to potentially some high-grade EM names trying to get done, but it will take some time for anything higher-beta and lower-rated to get done," he said, also pointing out that the World Cup might interfere.

The only catalyst for improved market conditions, he said, "seems like second-quarter earnings."

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