Risk appetite fades on economic news, but VEB, Cruzeiro do Sul price; EM inflows increase

By Christine Van Dusen

Atlanta, July 1 - Russian banks kept up their hot - well, maybe warm - streak on Thursday with the pricing of yet another deal from the sector, but for the most part new bond issuance kept to a snail's pace as emerging markets digested yet another dreary economic report from the United States.

"I'm a little bored," a New York-based market source said. "Today has been really quiet."

Yields on 10-year Treasuries fell early Thursday in response to news that jobless claims in the United States unexpectedly rose by 13,000 to 472,000, according to the Labor Department. Yields bounced back some by afternoon, but investors remained pessimistic about an economic recovery.

"The volatility of the last few days has again caused risk appetite to fade," a trader said.

What many market-watchers are looking out for now is Friday's report on non-farm payrolls. "We could get a relief rally in equity markets, post-payroll numbers, as most have been beaten down with market moves in the last week or so and are expecting a bad number," he said.

VEB prices notes

In the primary market, Thursday saw Moscow-based lender Vnesheconombank (VEB) price $1 billion 6.902% notes due 2020 at par to yield Treasuries plus 400 basis points, according to an informed market source.

Barclays, Citigroup, Societe Generale, ING, Troika Dialog and VTB Capital were the bookrunners for the Rule 144A and Regulation S deal.

Thursday's issuance by VTB followed Wednesday's pricing from another Russian banking name, Sberbank, which sold $1 billion 5.499% notes due 2015 at par to yield mid-swaps plus 345 bps.

And coming to market soon is a planned dollar-denominated issue of tier 2 loan participation notes, talked at 11¼%, from Moscow-based lender Promsvyazbank, as well as a possible issue of notes from TransCreditBank via JPMorgan and BNP Paribas.

Russia is warming up as a place for new issuance because the economy is growing somewhat, bank deposits are increasing and yields are low, a market source said. But the country's reliance on the oil trade means the sovereign remains a little risky.

Cruzeiro prints notes

Also printing on Thursday was a $200 million issue of 7% notes due 2013 from Sao Paulo's Banco Cruzeiro do Sul, priced at 99.337 to yield 7¼%, according to a market source.

BCP Securities was the bookrunner for the Regulation S-only deal, which had been talked at 7% to 7¼%.

Other than that deal, "Latin America has been quiet," the New York-based source said. "It's a little bizarre. Guys get their coupons and have to start investing but there's no new supply."

He expects the Latin American drought of new issuance will continue until at least after the July 4 holiday.

"That's pretty much it," the New York-based source said.

Some LatAm names perform

Meanwhile some Latin American names traded fairly well on Thursday, with Mexico, Brazil and Peru as particular standouts, he said.

"The bids are still there," he said. "There are better buyers of bonds. For the Brazils of the world, BBB-rated, they're sort of the new U.S. Treasuries of Latin America. The appetite is just insatiable. There's better buying of those assets."

But more speculative-grade paper, like that from Venezuela and Argentina, was "selling off," he said. "That stuff is inactive overall. Buying the speculative stuff is more of an equity trade. If equities stabilize and do better, then guys will have confidence."

Venezuela was "underperforming most other credits" on Thursday, a trader said. "Argentina and Venezuela bonds ended down ¼ to 1¼ bps."

Currently there's so much cash building up and so little new issuance that "guys have to buy something," he said. "For the highest-rated stuff there are no problems. Brazil and Peru have decent growth. Mexico is OK and for the time being is off the radar screen, and the fundamentals are pretty good."

In general, emerging market sovereign bonds ended the day mixed to lower, the trader said.

Inflows tick up

Emerging market bond funds saw inflows of $693 million for the week ended June 30, according to data tracker EPFR Global. That's up from the previous week, when inflows totaled $673 million.

"I think what the numbers suggest to me is that EM bond funds are really managing to hang on to a surprising safe-haven status at the moment," said Cameron Brandt, global senior analyst for EPFR. "There weren't a lot of fund groups that took in money, but this was one of them."

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