EM trading activity muted; Mazovian Railways, Development Bank of Kazakhstan plan deals

By Christine Van Dusen

Atlanta, Nov. 30 - Emerging markets issuers sat on their hands on Tuesday as investors continued to shun risk in light of the continuing European debt crisis, tension on the Korean border and China's monetary tightening.

"That's hit the debt markets," an emerging markets strategist said.

Only Eastern European issuers seemed to be staying in the game, with Poland's Mazovian Railways marketing a potential offering of notes and Development Bank of Kazakhstan setting the size at $2 billion for its planned issue of global bonds.

But at the same time, Hungary's bonds and Russia's bonds continued to plummet, along with much of the rest of the emerging markets universe, market sources said.

"This week is ultra-nervous," a London-based market source said. "The worries of the European Union, with Ireland and Greece, have infected the emerging markets world. Everything is trading weaker and the market-makers are not wanting to bid, so there's almost zero liquidity."

Spreads widen

Five-year credit default swaps were wider across the board, with Venezuela up about 60 basis points by mid-afternoon and Argentina up more than 35 bps, a Toronto-based market source said.

"Most others are about 3 to 5 bps higher," he said. "The negative tone has continued."

Brazil's 2040 bonds were "taking a hit" on Tuesday, he said, seen about 7 bps wider.

"Similar behavior has been observed in some of the domestic curves," he said.

That was not so for Mexico, though. "The domestic curve is actually doing better today," he said. "It has flattened about 10 bps. That may be a relief rally. But I think that's more of an anomaly than a longer trend."

Overall, the market traded softer, the strategist said.

The JPMorgan Emerging Markets Bond Index Global ended the day 13 bps wider, while the JPMorgan Emerging Markets Bond Index Plus finished 7 bps wider.

Hungary in focus

Hungary experienced some weakness on Tuesday, partly as a result of the European debt crisis' contagion effect. "That one is about 10 bps wider," the Toronto-based source said.

Moody's Investors Service is expected to make a decision on the sovereign's rating within a couple of weeks.

The ratings agency does not believe Hungary's debt dynamics work in the current environment, "clearly indicating that a downgrade is coming," according to a report from RBC Capital Markets.

Said another market source: "Obviously a lot of concern is centered on what's going on in Europe, and some of the concerns have shifted from the larger European sovereigns. This could keep getting worse."

Inflows streak ends

Already the ongoing European economic crisis has taken its toll on inflows into emerging markets bond funds.

After a 25-week streak of inflows, emerging markets bond funds saw outflows for the week ended Nov. 24, according to data tracker EPFR Global.

"Outflows from emerging market bond funds were concentrated in funds with hard currency mandates as events in Korea and the Eurozone depressed risk appetite, with the spread between U.S. Treasuries and JPMorgan's benchmark EMBI+ index jumping briefly back over the 250 bps level," EPFR said in a report.

Mazovian Railways plans notes

The primary market remained a ghost town on Tuesday, with just a few issuers moving forward with deals.

Development Bank of Kazakhstan set the size for its planned offering of global bonds at $2 billion, according to an announcement from bookrunner Halyk Finance.

Deutsche Bank, Citigroup and JPMorgan are also bookrunners for the Rule 144A and Regulation S deal, which will be marketed on a roadshow in Europe, Kazakhstan and the United States starting Dec. 1.

And Poland-based Koleje Mazowieckie (Mazovian Railways) is on a roadshow for a possible issue of euro-denominated senior notes, a market source said.

Standard Bank is the bookrunner for the Regulation S deal.

"Some of this may be intervention-related, with sovereigns issuing offshore paper to keep capital flows out of domestic markets," the Toronto-based source said.

Generally, though, most issuers are likely to wait until 2011 to bring new deals, the strategist said.

"I think they're going to sit it out a while," he said. "I think that will be the case."

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