U.S Treasuries' nosedive, Ukraine jitters put investors on defensive; Venezuela's $250 million retap

By Reshmi Basu

New York, Nov. 29 - Continued investor angst over the election controversy in the Ukraine and a plunge in U.S Treasuries pulled down emerging market paper Monday.

Ukraine remained wracked by conflict over the disputed presidential election Monday.

Departing president Leonid D. Kuchma suggested a new election might be an option while Ukraine's Supreme Court heard claims of fraud over last week's Nov. 21 election, in which pro-Russian prime minister Viktor Yanukovych was declared the winner. But opposition candidate Viktor Yushchenko has since filed an appeal.

Ukraine's uncertainty wore down the general market early on, said a buyside source.

There were some trades in Ukraine and Russia earlier in the morning, "particularly people who tried to hedge Ukraine with Russia," said the source.

"But we had a comeback later in the morning after the news of the potential second elections. Things came back a lot in Ukraine. Then everything else recovered."

Ukraine's was still down during the session, but managed to erase some losses, as the trading day progressed.

Earlier in the session, Ukraine's dollar-denominated 7.65% due 2013 was at 98½ bid, par offered, down from 101.00 on Friday. But it crept back to 100 bid or 332 basis points over 10-year Treasuries.

Earlier, the U.S. dollar-denominated 11% due 2007 was at 103 bid, 104 offered, down from 104½ on Friday. That bond finished the day at 103½ bid.

The Brady bonds due 2007 were bid at 103½ or 510 basis points over the two-year Treasury.

The euro-denominated 10% due 2007 was at 102¾ bid, 103½ offered, down from 104¾ on Friday.

In other news, another blow was delivered to prime minister Yanukovych as his campaign chief and head of the Central Bank, Serhiy Tyhypko, resigned in disgust over the election turmoil.

"What we're hearing is that Serhiy Tyhypko has resigned as governor of the National Bank of Ukraine," said a market source.

"You also are hearing that the eastern provinces have already stopped paying taxes to Kiev.

"The question you're beginning to hear people ask is, given this ongoing crisis, how does Ukraine continue to meet its debt obligations?"

Treasuries pull back

Another factor dragging emerging market lower was the tumble by U.S Treasuries. Benchmark yields leaped to their highest level since August. The yield on the 10-year Treasury stood at 4.32% at the end of the session.

"The market was basically on the defensive for most of the day," said Enrique Alvarez, Latin America debt strategist for think tank IDEAglobal.

"The market had grown too complacent about what U.S Treasuries were doing and based on that, we have seen a sizable slump in the market today [Monday].

The Brazil C bond lost 0.63 to 100.12 bid while the bond due 2040 fell ½ point to 115 bid. The Ecuador bond due 2030 lost ¾ of a point to 85 bid. The Mexico bond due 2008 lost 0.20 to 113.80 bid.

Venezuela retap

The Bolivarian Republic of Venezuela announced that it plans to reopen its existing 9 3/8% bonds due Jan. 12, 2034 (B2/B/B+) in the local market.

The expected size of the reopening is $250 million.

"Earlier in the session, it looked like that was affecting the prices a lot," said Alvarez.

"The '34s were lower by the most amount within the market, and then came back a little bit as crude held steady," he said.

"It's sort of a time where you still have a decent opportunity to place paper, but you got to rush it because the [U.S] Treasury market here can rapidly turn again Latin America.

Venezuela is also turning to local participants to play in the retap.

"It's the standard step that they've been doing, which is that they are able to liquidate the actual purchase in Bolivars at the office exchange rate.

"It soaks up some of the Bolivar liquidity from a local market and it gives local investors access out to dollars."

Dresdner Kleinwort Wasserstein and ABN Amro are running the offering.

During Monday's session, the Venezuela bond due 2034 plunged 1.55 to 103 bid.

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