Emerging markets weaken; equities set tone; Banco BMG prices $250 million

By Aaron Hochman-Zimmerman

New York, March 10 - Emerging markets were forced to hold off another sour day in equities as Treasuries gained to pull spreads wider.

In general, investors continue to sit on piles of money, but on Monday Brazil's Banco BMG found a market receptive enough to price $250 million 6 7/8% notes.

"There's lots of cash out there on the sidelines," an emerging markets strategist said.

The secondary's light volumes kept prices in check and produced no outstanding issues for the session.

"The current thought is: why buy it today when you can buy it cheaper tomorrow?" the strategist said.

Market watchers are also looking ahead to the March 18 meeting of the Federal Open Market Committee.

Many feel the cut will be 50 basis points, rather than a more drastic 75 bps, a market source said.

The March cut may likely be the last reduction of the cutting cycle or at least serve to wind down the interest rate action from the Fed, another market source said.

Volatility held a steady upward track and added 1.89 to finish the day at 29.38, according to the VIX index. The index is a frequently used measure of market volatility.

Treasuries advanced to open the week as emerging markets widened by 7 bps to a spread of 303 bps, according to JPMorgan's EMBI+ index. The EMBI+ determines the amount of extra yield investors are willing to accept to hold assets in emerging markets debt.

The EMBI global diversified index, which represents sovereigns and quasi-sovereigns was wider by 7 bps with a spread of 326 bps.

The diversified index has a less strict liquidity rule for inclusion.

Emerging Europe slides

Emerging Europe weakened on a quiet day that tracked equities lower.

Russia began exporting electricity to Belarus on Monday, according to the Itar-Tass News Agency.

In 2008 about 2 billion kilowatt-hours will come from Russian Unified Energy Systems Co.

Belarus is working toward an arrangement to import the same amount from Ukraine as well, although Belarus hopes to import up to 5 billion total kilowatt-hours this year.

The Russian sovereigns due 2030 slipped just 0.125 point to 114.625 bid, 114.875 offered.

The Ukrainian sovereigns due 2016 were quoted at 96.5 bid, 96.5 offered.

Turkey's southern city of Adana is set to receive new investments to boost its energy production.

The city generates 6% of the country's energy and is already considered a major energy producer, according to the Turkish Daily News.

The new investments are expected to fund the Tufanbeyli Thermal Power Plant and the Yedigoze Dam. The dam is expected to be operational in 2011.

The Turkish government bonds due 2030 dropped 1 point to 149 bid, 150.5 offered.

In Serbia, the coalition of prime minister Vojislav Kostunica collapsed, leading the cabinet to ask president Boris Tadic to call for new elections.

The sides are divided by the debate over E.U. membership. Most E.U. nations recognize the independence of Kosovo, which broke from Serbia on Feb. 17.

Pro-E.U. Tadic is likely to honor the call for elections.

Also in emerging Europe, members of Georgia's National Council of Opposition are on a hunger strike on the steps on the parliament building.

The protestors are demanding election reforms.

In South Africa, the outlook for exports is deteriorating, which may add to increased inflation pressures on the rand, according to a market source.

Despite record commodity prices, South Africa has done little to capitalize on the rally due to poor planning and infrastructure investment, the source said.

The rand was spotted trading at 8.029 to the dollar.

Elsewhere in Africa, Zimbabwe president Robert Mugabe signed a law requiring all white- or foreign-owned businesses to surrender a 51% stake to "indigenous" Zimbabweans.

Mugabe will face strong opposition during the upcoming elections scheduled for March 29, the report said.

LatAm softens as equities tumble

"It's been quiet," a strategist said, but prices continued to weaken under pressure from the major markets.

Argentina's reporting of a 0.5% rise in the consumer price index for February was higher than the expected report but is still likely lower than the true figure, a market source said.

The local media seemed to show enthusiasm for the apparent increase in transparency, the source said.

However, the source remained suspicious even if the evidence is beginning to look more favorable.

There is increasing support in the legislature's opposition parties for laws calling for greater oversight of the economic statistics agency Indec. Still, the opposition is too much in the minority to be effective, the source said.

The 8.28% Argentine discount bonds due 2033 fell 0.65 point to 86.6 bid.

Elsewhere, Brazil's 7 1/8% Brazilian bonds due 2037 were down 0.45 point to 106.3 bid, 106.6 offered.

Venezuela, Colombia relations normalize

Diplomats from Venezuela and Colombia returned to their posts after leaders of both countries shook hands on an end to the FARC crisis at a regional summit held in the Dominican Republic on Friday.

Ecuador, which was the location of Colombia's raid against the FARC rebels, has not yet restored ties.

At the height of the conflict, both Ecuador and Venezuela mobilized against Colombia, and Venezuela threatened to nationalize Colombian business interests.

However, trade was never completely cut off.

The Venezuelan 9¼% government bonds due 2027 were better by 0.5 point at 97 bid, 97.75 offered.

The Colombian 7 3/8% bonds due 2017 were quoted at 109.3 bid, 109.75 offered.

Banco BMG prices $250 million notes

The primary, which has often been the wallflower of emerging markets, produced a new issue on a down day in trading.

Banco BMG (Ba1/BB-/) priced $250 million two-year notes at 99.77 with a coupon of 6 7/8% to yield 7%.

The notes were offered at 7¼% on March 5, 7 1/8% on March 6 and 7% until pricing.

BCP Securities acted as the bookrunner for the deal.

Proceeds will be used for general corporate purposes.

Banco BMG is a Belo Horizonte, Brazil-based retail and commercial bank.

"In the absence of outflows it just leaves investors with more cash," a strategist said.

"When there's a brief lull, we'll see new issuance," he said.

Asia lower, wider

Treasuries advanced and pulled spreads wider in Asia; however, the low volumes helped to support the cash prices.

The Philippines' economy has fallen behind its East and Southeast Asian neighbors in the last 50 years, according to a report from the Asian Development Bank.

"The Philippines must raise revenues, improve infrastructure, strengthen governance to build investor confidence, expand its industrial base and improve access to employment and development opportunities to increase growth and reduce poverty," according to the ADB's web site.

"Growth has picked up in recent years, with the economy in 2007 posting its highest growth of 7.3% in the last three decades, both public and private investment remain sluggish and their share in gross domestic product has continued to decline, raising the question of whether the current economic momentum can be sustained," the site said.

The government's share of revenues proportional to its GDP is the lowest among the major economies in the region, the report said.

The Philippine sovereigns due 2030 added 0.5 point and was quoted at 129.5 bid, 130 offered.

Indonesia's stock exchange, which was the third-best stock performer in 2007, expects another strong year, according to the Jakarta Post.

The IDX composite index may not reach the 52% increase it managed in 2007, but IDX's president director, Erry Firmansyah, feels the index is ready to handle further global slowdown.

The Indonesian government bonds due 2017 were quoted at 104.75 bid, 105.25 offered.

Pakistan's two largest opposition parties agreed to form a coalition government.

The leaders, Asif Ali Zardari, the husband of slain former prime minister Benazir Bhutto, and former prime minister Nawaz Sharif asked president Pervez Musharraf to convene parliament.

China's trade surplus dropped in February, according to the BBC.

China exported only $8.6 billion more than it imported, compared to a surplus of $23.7 billion in February of 2007.

Some have suggested that the slump is related to a shrinking demand from the United States, but other analysts related the numbers to the Chinese new year celebrations.

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