Sovereign sector ignites: Philippines prices $2.1 billion, Turkey $1.5 billion; EMBI Global hits record tight

By Paul A. Harris

St. Louis, Jan. 6 - The sovereign sector took spark on Wednesday as the Philippines and Turkey priced deals totaling $3.6 billion. Both issuers were said to have played to massive audiences - with $6 billion said to be in their order books.

And both issues were seen trading up in the secondary.

Elsewhere J.P. Morgan's EMBI Global index saw its spread close the session at an all-time tight, one investor said, spotting it at 233 basis points, five bps tighter than Tuesday's close.

Meanwhile a trader said that the rising tide in emerging markets seems to be lifting all boats, with bond prices going up. Even the unhappier stories in the market seemed to get happier, the trader said.

However some sources wondered aloud during conversations with Prospect News whether the "all-time tights" which seem to be a daily occurrence in emerging markets recently might be getting somewhat too tight.

Philippines massively oversubscribed

The mid-week session's biggest issuance, approximately $2.10 billion, came in a two-part deal (B1/BB-/BB) from the Republic of the Philippines.

The Philippines priced a $1.5 billion issue of 7¾% 25-year bonds at 98.641 to yield 7 7/8%, at the tight end of the 8% area guidance, and €500 million issue of 6¼% 10-year notes at 99.112 to yield 6 3/8%, giving a 294.4 basis points spread to mid-swaps. The euro-denominated notes also priced tight to guidance of a yield in the 6½% area or mid-swaps plus 304 basis points.

Credit Suisse First Boston, Citigroup and Deutsche Bank were the underwriters.

By way of comparison to the new paper, one source spotted the Philippines dollar-denominated sovereign due 2030 at 118.13 bid, 118.50 offered, early Wednesday, which works out to a yield of 7.82% bid, 7.78% offered.

Meanwhile the euro-denominated sovereign due 2010 was at 114 bid, 115 offered, early in the session, or a yield of 5¼% bid, 5% offered.

New Philippines paper trades up

An investor told Prospect News that total demand for the new bonds topped $6 billion, and added that both issues traded up about half a point in the gray market.

A sell-side official, not in the Philippines deal, provided an explanation for the demand.

"The Philippines did not prefund last year and they were out of the market at least through the fourth quarter if not longer," the source said.

"People were underweight the Philippines and it was hurting them. So people have been waiting for this issue to load back up."

Asked whether the new issues from Philippines and Turkey caused damage to those countries' existing debt, the sell-sider said that the existings did not rally as much as the rest of the market Wednesday, but held in.

"I don't think that the new issue supply is hurting the secondary curve," the source added.

That turned out to be a unanimous verdict, Wednesday.

Turkey prices $1.5 billion

Also pricing a benchmark issue was the Republic of Turkey, which brought $1.5 billion of 6 7/8% 30-year global bonds (Ba3/BB-/BB) at 96.89 to yield 7 1/8%.

Turkey also came at the tight end of guidance: in this case for a yield in the 7.15% area.

Citigroup and Deutsche Bank ran the books.

A market source said that Turkey had commandeered about $6 billion of orders.

The above-quoted investor, meanwhile, said that the new Turkish notes were up half a point in the gray market.

However the 7 1/8% yield on the new Turkish debt prompted some head-scratching for this buy-sider.

A leap of faith?

The investor, asserting that Turkey is one of the countries that is most at risk in a higher interest rate environment, observed that "at some point if you buy stuff rich you are going to lose money."

Granted, the investor conceded, emerging markets generally has a higher credit quality than it used to, "and things are going their way.

"But to like EM here, you have to take a leap of faith that things are only going to get better."

The investor pointed to one of the few negative stories in the emerging sovereign space, Peru.

Peru, the source said, has underperformed over the past month or so because presidential candidate Ollanta Humala, seen as a wild card and another possible U.S. antagonist in the region, has been rising in the pre-election polls.

"I would not be surprised if he won," the buy-sider commented. "But all that did was take Peru to 200 [basis points] over.

"That's not a high-yield type of spread. That's a weak investment-grade type of spread.

"That's not compensating you for long term risk."

Market higher, spreads tighter

Elsewhere Wednesday a trader told Prospect News that emerging markets prices were higher across the board and spreads were tighter.

"There still seems to be money to put to work," the source said.

The trader spotted Brazil's benchmark global bond due 2040 closing at 130.25 bid, up about a point on the day.

Brazil's bond due 2015 was up about "a dollar on the day," the trader added, specifying that on a spread basis the 2015 paper was tighter by 15 bps.

Ecuador, Tuesday's outperformer, appeared to generate even more interest on Wednesday, the trader added.

Ecuador's sovereign due 2015, its newest bond, traded up a point and a half, the source added.

"People are looking for yield and new money is being put to work," the trader explained, adding that there is a better tone in equities globally.

The trader more or less verified the above-quoted investor's assertion that of late Peru has been the underperformer in the Latin sector.

But even that story has a ray of light, the trader said, adding that Peru underperformed Tuesday, and continued to underperform early Wednesday, but not nearly as drastically.

Russia and Ukraine

Sources continued to discuss the natural gas impasse, now apparently resolved, between Russian and Ukraine.

One sell-side official said that Russia's move last weekend to interfere with the flow of gas from state-controlled OAO Gazprom into Ukraine - in an apparently threatening gesture - came just at the time Russian Federation president Vladimir Putin is set to take over the presidency of the G8 for the next year.

Ukraine, which saw its bond prices fall on Tuesday, recovered Wednesday on news of the five-year gas supply agreement that it has hammered out with Russia.

One source marked both Russian and Ukraine approximately seven basis points tighter on the day.

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