Emerging market down on Greenspan's hawkish view; Gazprom two-times oversubscribed

By Reshmi Basu and Paul A. Harris

New York, June 20 - Emerging market debt dipped during Tuesday's session as Treasury notes fell on Federal Reserve Chairman Alan Greenspan's testimony to the Senate Banking Committee.

With a lack of U.S. economic reports this week, emerging markets looked to Greenspan to fill the void - and movements so far have been highly correlated with the movements of the Treasury market.

"It is all about the testimony," said a debt strategist. "It's all about two words. And those two magic words are 'transitory' and 'measured.'

"Is the weakness 'transitory' or is inflationary pressure 'transitory'?

"The bond markets are grappling with whether in fact the U.S, economy is speeding up or slowing down."

The effects of Greenspan's comments were immediately felt in the Treasury market. The 10-year was at 4.39% 12:30 p.m. ET before Greenspan spoke and finished the day at 4.44%.

Emerging markets suffered similarly.

The JP Morgan EMBI global index was down 0.62% but - in a sign of how emerging markets moved with Treasuries - spreads widened by just one basis point.

High beta names led the way down. Brazil's component of the EMBI was lower by 0.94% and Ecuador was down by 1.2%.

"It's been a direct reaction to what the Treasury market did right after we got word of what Mr. Greenspan had put together for the Senate," said Enrique Alvarez, Latin American debt strategist at IDEAglobal, a think tank.

Looking at the biggest component of the EMBI index, Brazil's losses were spread throughout the day, down before Greenspan spoke, down after he spoke and down more right at the end of the session.

At 12:30 p.m. ET, the Brazilian C bond was bid at 94.812 while the bond due 2040 was bid at 983/4, about ¼ and ½ point off from Monday's close respectively.

Levels were pretty much unchanged at the start of Greenspan's testimony at 2:30 p.m. ET, with the C-bond bid at 94¾ while the bond due 2040 was bid at 98.80.

But the bonds fell after Greenspan finished his Senate appearance. The C-bond was bid at 94.562 at 3:30 pm ET. The bond due 2040 was bid at 98.20.

By the close, the losses had widened, putting the C-bond down ¾ of a point to 94¼ bid while the bond due 2040 was bid at 973/4, down 1.55.

"Our market was a lot wider this morning before the comments. It seems to have outperformed [Treasuries] on post-comments," said a buy-side source.

In his prepared text, Greenspan said: "The evident strengthening in demand that underlies this improved performance doubtless has been a factor contributing to the rise in inflation this year.

"But inflation also seems to have been boosted by transitory factors such as the surge in energy prices."

"The market is keying off of Greenspan's view on inflation and, more importantly, where he needs to take rates - which continues to seem higher," according to Alvarez.

"Although he has reiterated that it [the increase in rates] should be at a moderate pace," he added.

"The market was pretty overdone and needs to pare back its gains on the Treasury side.

"And that has in turn contained Latin America," Alvarez noted. "You've seen some sellers enter the market this afternoon."

And the buy-side source added that Greenspan's testimony was "fairly hawkish," but the source feared that Greenspan has fallen behind the curve.

June has been a soft month in terms of economic data, but many are still wondering if the Fed is on track.

"He hasn't been aggressive enough. The risk is that he is not doing enough," said the source. "We have had 15 months of strong numbers before that [June data].

"The market believes what it wants to."

Looking ahead, Treasuries will be the key factor for emerging markets debt.

"I worry first what happens to Treasuries but secondly what happens to the stock market.

"If the stock market has a sell-off, it will be real tough for EM to do better," said the buy-side source.

Greenspan will return Wednesday for an appearance before the House Financial Services Committee.

Oversubscribed Gazprom

In primary action, OAO Gazprom expects to price at least $1 billion of 15-year bonds (/BBB-/BBB-) late in the present week.

No official price talk has surfaced, however the market is expecting to the bonds to price in the low to mid 7% range.

ABN Amro Holding NV, Merrill Lynch & Co. and Morgan Stanley are bookrunners on the deal.

The bonds, which will be secured with gas export receivables, will have a 7.4-year average life.

Gazprom, based in Moscow, is the world's largest natural gas producer.

Another buy-side source is said the book is two-times oversubscribed, with most of the interest from crossover accounts.

Chexim talk, Uruguay plans

And Export-Import Bank of China has set price guidance for its dollar-denominated benchmark-size notes offering (A2/BBB+ expected) in the area of Treasuries plus 96 basis points.

Deutsche Bank, Citigroup, Goldman Sachs and HSBC are running the Rule 144A/Regulation S deal for the state-owned bank

Also in primary news Tuesday The Oriental Republic of Uruguay is expected to issue a two-tranche bond offering of Unidades Indexadas (UI) bonds due August 2007 and devaluation-protected notes (DPN) due February 2006 via Citigroup and ABN Amro. No size has yet been disclosed.

Russia's liquidity crisis seen over

Meanwhile in Russia, the recent banking turmoil is seen as calmed.

Russian banks faced a confidence crisis, which led to the withdrawal of deposits by private clients a few weeks ago. Russian debt was immediately hurt - but has since rebounded.

Measures taken by the Central Bank of Russia as well as approval by parliament of a deposit guarantee scheme have put a lid on investors' concerns for now, the strategist said.

"If you got the deposit guarantee, then what it means in the case of deposit flight, the central bank will print the rubles and supply it to banks," said the strategist.

This may lead to concerns over higher inflation, which in turn means currency weakness - which is the way that it evolved in Indonesia.

"The gamble is that by announcing the deposit insurance, you never have to implement it.

"If people know that their money is good in the bank, they won't take it out and you won't have to increase the money supply," he added.

And today's Russia is completely different than Indonesia in the 1990s.

"In 1997, Indonesia had whole lot of dollar debt and a current account deficit.

"And it was a question of its reserves, so people panicked and took out the money anyway."

By printing bank bills, the country created the paper that was exchanged for hard currency, the strategist explained.

"You actually finance the attack on the currency," he said.

In a banking crisis, investors have to look at the country's balance of payment position and reserve position. And Russia is sitting pretty and can head off a banking crisis.

"They are sitting on a boat load of reserves. They have oil and they have a current account surplus."

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.