Emerging market debt softer on Treasuries, commodities; Venezuela posts more losses

By Reshmi Basu, Paul Deckelman, and Paul A. Harris

New York, Jan. 10 - Emerging market debt continued to trade with a weaker tone Wednesday, prompted by a host of headaches such as lower commodity prices and Venezuela's move towards the left.

For the third consecutive session, Venezuela suffered losses in response to president Hugo Chavez's push for a socialist agenda, which included his vows to nationalize utilities, among them the nation's electric power and telecommunications networks.

The news should not come as a surprise to anyone, noted an investor, who added that Chavez's promises of a "Bolivarian revolution" are not empty threats.

As evidence, he cited the one-sided brokering in which Chavez pressured transnational oil corporations such as Shell, Chevron, and BP to form joint ventures with state oil monopoly PDVSA.

"We'll give you a deal - a good economic deal. You can take the deal or we'll just take everything," he described.

"But the economic damage to the owners probably will not be as bad as the headlines," he noted.

However, one of the big issues will be the government's accountability under multiple currency regimes. In addition, the degree to which the government cooks the books will drag down investor confidence.

But while political risk has jacked up, the country's external debt has not moved that much, according to the investor.

"It's been really almost a yawn. The market has sold off a little," he observed.

In trading, the Venezuelan bond due 2027 gave up 0.40 to 123.40 bid, 123.70 offered.

Contained spillover from Venezuela

A trader who watches Latin American debt said that Venezuela "has been volatile, as you can imagine," but downplayed its impact on the overall market, adding that "it's hard to say that Venezuela is as liquid as you would expect."

A more reliable gauge might be the behavior of credit default swaps contracts in Venezuelan debt over the past few days.

The trader noted that the five-year Venezuela CDS contract closed at 164 basis points on the bid side, 167 basis points on the offer side, basically "right around" the 165 basis points mark at which that contract had closed on Tuesday - suggesting that "maybe we're all getting used to" Chavez's remarks.

But that was still quite wide of the levels around 149 bps to 155 bps seen Monday, before the market was able to fully digest the impact of the Venezuelan leader's latest remarks. The 15 basis points widening was "an important widening - but obviously not a panic."

Besides a certain familiarity with the Venezuelan leader, if not quite exactly a comfort level, there is the factor, the trader added, that "there's also just not that much Venezuelan debt out there."

Overall, Venezuela "definitely has been a focus in the market - but there's no panic."

Another trader agreed with the notion that the Venezuelan situation was throwing a wet blanket over emerging markets generally - even countries far from Latin America - by making investors nervous.

"I think that when you get to all-time tight spreads, which is where we have been treading for the better part of the last three to four week, you have a lot of jittery feet in the market and whenever you have any sort of systemic event such as this, even if it happens outside of your own one particular market, I don't think it will stay isolated to that one market [where it happened]."

He said that in his own, non-Latin market, "we're not seeing any massive pullback by any means, but when you're at spread levels such as these, any sort of news which could scare the market will have a near-term dramatic effect."

Bear Stearns stays put

In spite of the price pressure caused by the negative headlines this week, Bear Sterns has maintained its credit outlook for the country.

"Despite very fluid fundamentals, the questionable future of private property in Venezuela, and erratic economic formulation, we continue to keep Venezuela's recommendation at marketperform instead of shifting to underperform," said Bear Stearns in an analyst report.

The rationale behind staying at status quo is that the country enjoys a healthy balance sheet, which presumably should insulate it from price volatility, the firm said.

In the past, high oil prices insulated the country's external debt from Chavez's shenanigans.

However, as oil prices are now trading near a 19-month low, the credit has lost some of its buffering from negative headlines. But there is an upside since lower oil prices mean less maneuvering room for Chavez, particularly abroad, noted the investor.

"They have been buying Argentinean debt, Ecuadorian debt, basically to be the sugar daddy of Latin America.

"If oil falls, his ability to do that also falls, so he's going to have to change his tune for Latin America and for politics," he said,

"But he does have a brand new mandate," noted the investor, referring to Chavez's landslide victory.

"This is what he wants to do. And I guess he wants to push it strongly."

EM softer

Overall, in trading Wednesday, the London open saw pressure despite a lack of significant flows, according to a market source.

Fast money and the Street were seen reducing positions.

In trading, the bellwether Brazilian bond due 2040 lost 0.05 to 132.40 bid, 132.50 offered.

In the Asian market, a second trader said that the market "certainly feels a little weak, with the backdrop of Treasuries trading off half a point.

"I think the fact that equities came back from their lows of the day certainly held the market in check towards the close, but overall, we are starting to see a little bit of client selling in some of the high yield names in the Philippines and Indonesia," he said.

EM resilient, says investor

The asset class is dealing with a host of negative headlines, which surfaced over a very short time frame.

Last Friday's surprisingly robust U.S. job numbers forced many investors to scale back their hopes of an interest rate cut in the near term, which has caused U.S. Treasuries to sell-off.

And the market is also contending with declining commodity prices, which has put a squeeze on Latin America.

To some, it may seem that bears have seized the market. But to the investor, the asset class has been resilient despite all the negative headlines ranging from Venezuela to Thailand.

"We're wider by 10 [bps] than we were a weak ago," remarked the investor.

"Look at Venezuelan dollar debt, it's amazingly resilient."

Ecuador dips

Among other specific names, Ecuador's bonds were easier after a local audit commission empanelled by the country's outgoing President Alfredo Palacios to investigate Ecuador's external bonds concluded that part of the country's debt is illegal - which could give his incoming successor, Rafael Correa, more rhetorical ammunition to use should he decide to restructure Quito's approximately $11 billion of debt, including $135 million of interest payments coming due next month.

The prospect of such a restructuring - which could include a deliberate default - has roiled the market since Correa's election in November, since he and other incoming officials had alluded to a default like Argentina underwent in 2002 as a possible scenario.

Ecuador's bonds have also been pushed down by continued weak oil prices, since petroleum is one of the country's most important exports.

In Wednesday's dealings, Ecuador's bonds due 2015 were seen off 2 points to 78 bid.

In other Latin American news, Peruvian bonds traded up one point, on upgrade rumors, according to a market source.

Turning to Turkey, the country's planned privatization of three electricity grids will be pushed bank until after general elections, an unfortunate event, noted the investor quoted earlier.

"They really pulled out a big chunk of FDI [foreign direct investment] that they expected this year," he said.

In trading, the Turkish bond due 2009 due 2009 fell 0.57 to 114.535 bid, 114.883 offered.

Softer Asia

Turning to Thailand, its debt market traded down Wednesday. On Tuesday, Thailand's military government proposed new restrictions on foreign ownership in the country's companies. On Wednesday, the finance minister Pridiyathorn Devakula tried to placate investors by saying that some industries would be exempt.

During the session, the Thailand bond due 2017 edged lower by 0.17 to 106.235 bid, 107.091 offered.

New Turkey bonds down

Meanwhile Tuesday's reopening from Turkey traded lower in the secondary.

In the previous session, the country issued $1 billion in new debt Tuesday in a dual reopening of its global bonds due 2016 and 2036 (Ba3/BB-).

One source described trading as a bit heavy.

"I was surprised that they tapped, period," remarked the investor

The retap for each tranche was downsized from $750 million to $500 million. Another source said the issue was streamlined from a hoped for $2 billion to $1 billion.

The country retapped its 7% global bonds due 2016 to add $500 million. The reopening priced at 101 7/8 to yield 6.732%.

In the secondary, the 2016 bond was spotted at 101.50 bid, 102 offered.

Meanwhile Turkey also reopened its 6 7/8% global bonds due 2036 to add $500 million. The retap priced at 95 7/8 to yield 7.215%.

In trading, the 2036 bond was quoted at 95.25 bid, 95.75 offered.

Also on the sovereign side, the new Philippines 6 3/8% bond due 2032 was seen a little bit softer, tracking the weaker Asian sentiment.

According to the second trader, the bond was trading at a 97.50-97.625 bid context, versus their 97.862 issue price on Tuesday.

Meanwhile the investor said the country came up with a nice strategy.

"We knew it was going to come. But to come with such a long piece of paper and then just say that we are done for the year.

"It's a smart way to play it."

And the second trader said that the new ICICI Bank bonds sold on Tuesday "traded firm" in secondary dealings.

He saw "good buying interest across the curve" in the new paper of the Mumbai-based commercial bank, India's second-biggest.

He spotted ICICI's three-year floating-rate notes, which priced at par Tuesday to yield 54 basis points over the three-month Libor rate, had tightened to a 50-48 bps context; the new 12% five-year notes had narrowed to a 114 bps bid, 110 bps offer context from a 114.3 bps spread over Treasuries at pricing, while the new 6 3/8% upper tier 2 subordinated notes due 2022 had tightened to 170 bps bid, 168 bps offer from 174.8 bps over Treasuries.

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