China Glass talks downsized deal; EM gains with U.S. stock market; Venezuela firm amid Merrill warning

By Paul Deckelman and Aaron Hochman-Zimmerman

New York, July 3 - During a quiet Tuesday session, shortened in the United States ahead of the July 4 Independence Day holiday, the market seemed to hold onto Monday's gains on the back of improving prices in the U.S. stock market.

China Glass Holdings set price talk for its downsized $100 million bond offering in the mid-to-high 9% area.

And Venezuela's recently battered benchmark 2027 bonds held in despite a warning that came in the form of a research report from Merrill Lynch.

A quiet session

The secondary arena for emerging market bonds was understandably quiet on Tuesday, with the U.S. fixed income market on an abbreviated pre-holiday schedule ahead of Independence Day.

Early gains, riding on Monday's upside momentum, faded a little when U.S. Treasuries fell back as a government report showed that factory orders in May fell 0.5% - less than half of the decline that economists had been looking for. That helped move Treasury prices lower and yields higher, with the benchmark 10-year bonds' yield - which on Monday had dropped below the psychologically potent 5% mark for the first time in nearly a month - pushing back up to 5.05% at the close, up from 4.99%.

But despite that retrenchment, EM bonds continued to improve, tracking U.S. stocks higher for a second consecutive session. The average emerging spread over Treasuries - the key barometer of investors' willingness to absorb additional risk - was seen to have edged downward by 5 basis points to 168 bps on the widely followed EMBI+ index compiled by JP Morgan & Co.

That is a little below the recent high-water mark of 175 bps at which the index ended June following a vicious bout of spread widening as emerging debt sold off badly. But it remains nearly 20 bps wider than the all-time tight readings in the upper 140s seen just a month earlier.

A New York-based trader in Latin American issues said that with most players saying adios well ahead of the official 2 p.m. ET early close, "there was not a ton of stuff going on."

He said that the market was "trading well earlier, when stocks were up and Treasuries were up, but Treasuries made a little bit of a left turn here and we kind of followed along [later in the day].

"We started to widen out a little bit, and traded lower, along with Treasuries."

Venezuela holds in

He said the retreat from the early highs "was pretty much across the board - Colombia, Brazil, Venezuela - but there were no major flows here."

He pegged the Venezuelan 9¼% dollar-denominated benchmark bonds due 2027 at 107.5 bid, 108. He noted that those bonds had hit early highs around 108.5 bid before coming in, but added "we're still up on the day - but off the highs."

Another source saw the bonds ending the day quoted at 107.25, up only modestly from the 107 bid level at which they had ended on Monday, when they rose nearly 3 points in a broad EM comeback from last week's weakness. The yield on the bonds was seen holding steady around 8.52%.

Beyond the generalized EM pullback from much of its early gains, investors in Venezuela's bonds may have also been put on the defensive by a negative research piece released Tuesday by Merrill Lynch & Co., which warned that the country's bonds - already the second-weakest performer among emerging market debt this year with a loss of about 9% since early January - could continue to decline.

Merrill Lynch's Latin American debt strategist Pablo Goldberg cited political developments such as the growing opposition to president Hugo Chavez's efforts to change the Venezuelan constitution so that he could continue to run for the presidency indefinitely - the document currently limits the number of terms the president may serve - as well as the turmoil caused in the market when the outspoken strongman threatened to pull his country out of the International Monetary Fund, a prospect that could produce technical defaults on some of its bonds.

While Goldberg noted that officials in Caracas have shelved that notion for now, it remains a possibility, since Chavez ordered his ministers to look into the technical aspects of a pullout in hopes of being able to make good on his threat without triggering a default.

The analyst said that only "an explicit announcement by Venezuela that it is abandoning its plans to leave the IMF" could spark a rally in the country's bonds - an event which Goldberg considers "unlikely for the time being."

Overall, he said, "there is no need to rush to return to Venezuelan bonds," adding that the bias is "for further weakness in the short term as political developments unfold."

Elsewhere in the Latin American market, Brazil's benchmark 11% global bonds due 2040 - considered the most liquid and widely traded EM issue - gained about 3/16 point to finish at 131.6875.

Mexico's peso-denominated debt firmed for a second straight day, given a boost by Standard & Poor's having raised its outlook on the country's BBB foreign currency debt to positive from stable previously. Its benchmark 10% bonds due 2024 were up about 1/3 point to just below 122.80.

All told, the trader said, activity was "choppy. You're not going to get much going on at this point in the day. There was a decent amount of some bonds traded earlier - but right now, it's kind of dried up."

Sellers in Philippines CDS

A trader in Asian debt said that while "LatAm was moving around quite a bit and was pretty firm in the morning," before coming off [the highs] at the close - "it was a soft close" - there was little going on in his sector of the emerging markets world.

Asia, he said "was incredibly quiet." He noted that there had been a holiday in Hong Kong at the beginning of the week, and combined with the U.S. mid-week holiday," that put a damper on regional trading.

However, he added: "I would expect to see activity pick up as we approach the [U.S. June non-farm] payroll number, which is pretty important to the market, on Friday."

He said the cash market in the widely traded Philippines government bonds "had been holding up relatively well over the last couple of weeks, but we're finally starting to see some sellers come out of the woodwork, with spreads where they are."

The benchmark 2032 sovereign bonds were being quoted around 96.625 bid, while the 2031 bonds were seen at 110.75 bid.

He said that the five-year credit default swap on the sovereign debt was quoted at a bid/ask spread of 113-116, "pretty much unchanged on the day," although that was wider than the 108-110 level seen a week ago.

Turkish lira bonds improve

Elsewhere, Turkey's lira-denominated local-currency bonds were seen having a good day as Ankara announced progress on reining in inflation - a key concern in a country which has had one of the highest inflation rates in the world.

Prices increased at an 8.6% annual pace in June, under the government's 8.7% target and well below the 9.2% inflation rate seen in May.

Five years ago, before Turkey began working with the IMF to bring down inflation, the rate was a yawning 70%.

The good news helped boost the lira bonds, whose yield came in about ¼ of a percentage point to 17.84% - its lowest point in a year.

Investors were also said to have been reassured by the prospect, borne out by political polls, that the ruling pro-business AK Party will have the strength in nationwide general elections being held on July 22 to be able to form another single-party government.

Quiet in the primary market

In the primary market players mentioned global growth, rising interest rates, the U.S. sub-prime market (along with housing problems in general), and the possibility that against this backdrop oil prices might rise.

An analyst said that the market was firmer on the back of improving U.S. equities on Tuesday.

Meanwhile terms emerged on one quasi-sovereign deal.

Zagrebacki sells €300 million

Zagreb, Croatia's Zagrebacki Holding DOO sold €300 million of 10-year notes (BBB) at mid-swaps plus 75 basis points.

The deal priced at 99.317 with coupon of 5½%.

Deutsche Bank led the deal to market.

Fully owned by the city of Zagreb, Zagrebacki has the strategic mission to provide essential municipal services and financing to key infrastructure development projects for Zagreb.

China Glass sets talk

In the corporate sphere of the emerging markets, China Glass Holdings Ltd. set price talk for its downsized $100 million offering of five-year senior bonds (B1/B+) at the mid to high 9% area.

The size of the Regulation S deal was cut to $100 million from $120 million.

Standard Chartered has the books for the debt refinancing and general corporate purposes deal.

New offer from Azgard

News also surfaced that Pakistan conglomerate Azgard-9 Ltd. will issue $200 million to $260 million senior unsecured notes (B+) via Citigroup.

Proceeds will be used to refinance debt incurred in the acquisition of Pak American Fertilizer Ltd. in 2006.

The Latin American sector

From the Latin American sector, Brazil's Lupatech Finance expects to price its $200 million offering of perpetual bonds (Ba3/BB-) within the next few days, according to a market source who spoke to Prospect News on Tuesday.

Talk is for a yield in the 10% area.

Citigroup and Merrill Lynch had the books.

Elsewhere, Argentine food producer Arcor SA postponed its $100 million offering of10-year senior unsecured notes (B+/BB-) due to market conditions.

The Citigroup-led deal had been talked at 8 3/8% to 8½%.

When asked about the chances of seeing deals return that have recently been pulled because of choppy conditions in the emerging markets asset class, an analyst said: "I think there will be some room for some of them to get back in the market.

"Another sub-prime shock could hurt, though, so we're not out of the woods yet."

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