Emerging markets tightens as Treasuries weaken; prices steady in Europe; primary stays quiet

By Paul A. Harris

St. Louis, Feb. 10 - Emerging markets debt held steady during the New York session, according to a mutual fund manager.

However an upward move in Treasury yields - the result of Wednesday's $25 billion auction of 10-year government paper - caused emerging markets spreads to tighten, the manager added.

The EMBI-Plus, the Emerging Markets Bond Index, finished at a spread of 304 bps, 12 bps tighter, according to the manager, who said he saw considerable volatility during Wednesday's session.

Earlier, during the European afternoon, Brazil's five-year CDS were at 152 bps mid, 4 bps wider on the day, according to a market source.

Mexico's five-year CDS were at 156 bps mid, 5 bps wider.

Among Latin American high-yield sovereigns, Argentina was at 1,096 bps mid, 21 bps wider on the day.

Venezuela was at 1,072 bps mid, 16 bps wider.

Russia, Eastern Europe hold in

Russian and Eastern European debt held on to gains seen heading into Tuesday's close, according to a London-based trader.

The persuasive Tuesday move came as German chancellor Angela Merkel's government disclosed to the press that it is considering providing economic support for the ailing economy of Greece, the trader said.

"Right now it's all about Europe," the source remarked, adding that recent market volatility is somewhat reminiscent of that which followed the September 2008 bankruptcy filing by Lehman Brothers.

"This time people are focusing on whether the euro is going to work," noted the trader, referring to the European Union's constitutionally mandated limits on sovereign debt as a percentage of GDP, and the market's apprehensions that without help, Greece, as well as some other E.U. countries, might be far beyond that threshold.

Russian 10-year bonds were at 112½ bid, 112 5/8 offered at Wednesday's European close, said the trader, adding that the Russian paper had tightened by 11 bps on the day.

Russian five-year CDS were heading out 17 bps tighter, while Eastern European names were 7 bps to 17 bps tighter.

Lithuania's new 7 3/8% global bonds due 2020 (Baa1//BBB), which priced at 98.273 to yield 7 5/8%, in a $2 billion issue on Feb. 4, were at par ¾ bid, on Wednesday, 2½ points above their issue price, but off the post-pricing highs, the trader said.

Quiet in the primary

In Europe the primary market is generating zero news because "everyone is spooked" by the situation in Greece, said the London-based trader.

For example, late last week The Russian Federation mandated Barclays Capital, Citigroup, Credit Suisse and VTB Capital as lead managers for its first sovereign eurobond issue in more than a decade, the source recounted.

However, in the interim not a whisper has surfaced, concerning the deal's particulars.

Latin America quiet too

As in Eastern Europe, so it is that the Latin American new issue market has lately hit still waters, according to an asset manager on the West Coast of the United States.

One deal in this investor's space that has lately apparently fallen victim to market conditions is Vanguarda do Brasil SA's $200 million offering of five-year senior unsecured notes (B3/B-/B-), via Morgan Stanley.

The Rio de Janeiro-based producer of soybeans and cotton came into the market in order to refinance short-term debt and to reduce accounts payable.

Although there has been no official word from the company or the bank, this investor believes the offer that the company hoped to bring to market is no longer on the table.

"It's been dead since last week," the investor said.

"They were trying to make some changes to the documents, to allow for land collateralization, and make the bonds secured by land.

"I'm not sure the deal was officially pulled. But the silence says it all."

Avoiding the stigma

Vanguarda do Brasil would like to avoid an official "deal-postponement" announcement due to the stigma attached to such a public move, the investor explained.

"First of all, they want to leave the door open, in case the market comes back," the buy-sider said.

Also, postponing a deal has more dire ramifications for smaller issuers, the investor added.

"Bigger issuers can cite market conditions and decide to pull a deal - say, a sovereign, or some of the more common issuers.

"But the smaller ones, or companies that are coming for the first time, don't want that kind of headline associated with their attempt to issue bonds."

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