Emerging markets tighten; Argentina discount bonds weaken; Vnesheconombank taps banks

By Paul A. Harris

St. Louis, Feb. 8 - The EMBI Plus Emerging Markets Bond Index ended the Monday session at a spread of 323 basis points, 4 bps narrower on the day, according to a market source.

Although the EMBI spread came in marginally, a look at the spread's move year to date renders a picture of an emerging markets investor base that has undergone a shift in sentiment, according to Enrique Alvarez, head of Latin America fixed income research at IDEAglobal.

Recounting that the EMBI plus spread began the year at 277 bps and retracted to 265 bps on Jan. 8 - the tight so far this year - the widening to the present spread range reflects the extent to which emerging markets had become overpriced.

During the fall of 2009 and the early weeks of the present year prices of emerging markets bonds increased to October 2008 levels, Alvarez said

"It was a liquidity issue, where you had a lot of cash to put to work, and people were chasing yield," he said. "The investor crowd became careless, and bid up prices very high, based on the perception that there were no accidents about to happen in Latin America."

That was true as far as it went, the strategist said.

However it failed to consider the necessity for economic recovery to bring health back to commodities, and therefore to Latin American exports.

"It was also blind to sovereign risk elsewhere in the world, particularly in Europe," he added.

Alvarez concurred with other market players who have told Prospect News that the EMBI 300 bps level served as a totemic threshold for investors: below 300 bps people were bullish, and hunting for yield; above 300 bps they became more risk-averse, and more sensitive to ratings.

Argentina moves lower

Emerging markets moved more laterally than U.S. stock markets, which took another leg down on Monday, IDEAGlobal's Alvarez said.

The exception was Argentina, which was the Monday session's big loser.

Argentina's widely followed dollar-denominated discount bonds due 2033 finished the day 62¼ bid, down 2½ points, with the spread widening by 51 bps.

Two factors are weighing upon Argentine debt, Alvarez said.

One factor is Argentine president Cristina Kirchner's appointment of Mercedes Marco del Pont as central bank president. Marco del Pont has had a confrontational relationship with the Argentine congress and is perceived to have little autonomy from Kirchner and the executive branch of government.

The second factor is the growing risk that eroding prices pose to Argentina's long-awaited debt exchange.

The exchange is now expected to come in March, Alvarez said.

That provides time for further price erosion, which will ultimately make the exchange more difficult for Argentina to bring off.

"The more prices descend, the more expensive it becomes to do an exchange," the strategist said.

"They are going to be issuing new money bonds and new discount bonds, and prices are going in the wrong direction for them to get that done."

Spillover from Europe eyed

The recent credit events in Europe - which began when E.U. finance ministers and central bankers conceded that Greece is carrying an unsustainable amount of debt relative to its GDP, and then spread to concerns that other E.U. countries including Spain, Portugal and Italy might also be in much the same condition, with respect to their debt-to-GDP ratios - have not factored hugely in Latin American debt, Alvarez said.

Investors were already experiencing fatigue as regional and global economic growth has been slow to materialize. The "Greece" scare had some "frontal impact" a week or so ago. However the drama of that impact was dampened against a backdrop of continued slow economic growth.

If one Latin American credit has sustained more conspicuous damage, it would be Brazil, Alvarez said.

Brazil's global bonds due 2034 were 122¼ bid, 123 offered on Monday, flat on the day.

However that paper was trading above 128 in mid-January, Alvarez said.

The reason Brazil's debt has sold off more conspicuously is that so many investors were long Brazil, and Brazil sold off with some of the European sovereign debt.

Vnesheconombank taps banks

The primary market passed a quiet Monday.

Russia's Vnesheconombank mandated Barclays Capital, Citigroup, HSBC, Societe Generale, ING, Troika Dialog and VTB Capital to lead a benchmark-sized eurobond offering, market sources said.

The prospective issuer is the Moscow-based Bank for Development and Foreign Economic Affairs.

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