Hungary bringing benchmark euro deal; Brazil 2040 hits all-time high again; late rally sends market up

By Paul A. Harris

St. Louis, Jan. 9 - Following a slight luff early in the session, emerging markets debt rallied to new highs and tights once again by Monday's close, sources said.

Characterizing the session as a quiet one, a trader marked Brazil's benchmark 11% bond maturing in 2040 as closing at 131.45 bid, up about 0.40, another all-time high in terms of the bond's dollar price.

"Mostly everything came alive in the last half hour," the source commented.

Another source spotted the Brazil 2040 at 131.35 bid, 131.50 offered, or 169.3 basis points bid, 167.50 bps offered, on a spread basis.

Meanwhile in the primary market, Hungary announced its intentions to price a euro-denominated benchmark-sized deal on Tuesday or Wednesday.

'Wall of money' argument

Early in the Monday session, an investor, noting that the market had closed at all-time tights on Friday, said that emerging markets fixed income has lately gotten to the point "where I expect spreads to shrink by three basis points a day."

Asked to explain the phenomenal run-up in emerging markets bond prices that has been playing out since mid-December, the investor said that the explanation could exist in a special case of technical strength.

"I find it hard to believe that institutions are mandating dollar-denominated emerging markets fixed-income investments at this point," the buy-sider said, adding that such an institutional decision-making process would have no doubt gotten underway months ago, when bonds were much cheaper.

"I find it hard to believe that anybody is so dogmatic that they are still happy rolling out that investment at a 6¼% yield on the EMBI," the source said.

"But somebody is buying it."

Among the alternatives that this investor had at hand were "very rich onshore banks in some of these countries that don't want to lend into the corporate market, who would rather buy a sovereign in a hard currency than expand their loan portfolio.

"I think that it's an easy - and potentially lazy - diagnosis to say it's all institutional money flowing in," the investor said.

"It could be. But is all the price appreciation that we have seen over the past 18 months just institutional buying?"

Philippines trades up

Also getting a lift Monday were the new Philippines 7¾% 25-year bonds, $1.5 billion of which priced at 98.641 last week.

The investor spotted the paper early Monday trading at 100 bid, 100.25 offered, after having gone out at 99.375 bid, 99.75 offered on Friday.

"The rest of the benchmarks on the long end were up half a point overnight in Europe," the source said, adding that at that point, Monday morning, the market was starting to look a little soft with Treasuries, "but super-dull."

Uruguay firm on S&P outlook

News that Standard & Poor's revised the outlook on the Republic of Uruguay's long-term sovereign credit ratings to positive from stable, citing improved economic fundamentals amid a continued economic recovery and better policy execution, appeared to generate better bids on Uruguay's paper, one trader said late Monday - although the country's bonds finished the day unchanged on the session.

The source saw Uruguay's benchmark 7½% bonds due 2015 trading at 104.75 bid, 105.50 offered. Meanwhile Uruguay's 9¼% bonds due 2017 were at 115.50 bid, 117 offered.

The primary market

News of one sovereign deal surfaced during the session.

The Republic of Hungary issued guidance of mid-swaps plus 14 to 16 basis points on its benchmark-sized euro-denominated 10.5-year global bonds (A1/A-/BBB+) on Monday.

Pricing is expected to take place Tuesday or Wednesday.

HSBC, Societe Generale and UBS are joint bookrunners.

Elsewhere The New Reclamation Group, a South African waste recycling company, will begin a roadshow Wednesday in London for its €245 million offering of seven-year senior secured notes, an acquisition deal coming to market via Citigroup.

The National Gas Co. of Trinidad and Tobago Ltd. will also begin a roadshow on Wednesday for a $400 million offering of 30-year senior unsecured notes (A3/BBB+).

Citigroup and Lehman Brothers will be joint bookrunners.

And JGSH Philippines, a wholly owned offshore subsidiary of JG Summit Holdings, Inc., talked its $200 million offering of seven-year putable fixed-rate notes with an 8¼% area yield to put.

The Philippines conglomerate is expected to price its deal following the Wednesday conclusion of its roadshow.

Credit Suisse First Boston has the books.

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