Emerging markets pull tighter; Volumes at holiday levels; Israel Electric prices $1 billion

By Aaron Hochman-Zimmerman

New York, May 2 - Emerging markets wound spreads tighter as Treasuries were beaten back, but thin volumes left trading desks quiet.

"The rest of the world is still on vacation," a syndicate desk official said.

However in Argentina, farm workers were away from their jobs for a different reason as protests resumed over new export taxes.

The country's credits sank as "we'll see some more volatility from there," a buysider said.

The Argentine discount bonds due 2033 fell 1.65 points.

Still, sentiment was positive as the week closed with Brazil's upgrade still on the minds of investors.

"Bid, ask spreads are tightening in emerging markets," a strategist said, adding that pipeline production has also been on the rise.

On Friday the primary produced $1 billion 7¼% 10-year bonds from Israel Electric Corp.

In equities, stocks inched higher as volatility dropped by 0.7 to 18.18, according to the VIX index. The index is a standard yardstick of market volatility.

Treasuries were shoved lower, which made way for emerging markets to tighten by 13 basis points to a spread of 248 bps, according to JPMorgan's EMBI+ index. The EMBI+ calculates the amount of extra yield investors will demand to hold assets in emerging markets debt.

The EMBI global diversified index, which represents sovereigns and quasi-sovereigns, was tighter by 12 bps with a spread of 277 bps.

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

Emerging Europe watches primary

Prices in emerging Europe held still on slight holiday volumes as investors in the region paid more attention to the pricing of Israel Electric's $1 billion 7¼% bonds.

Still, spreads wrapped in as Treasuries were on the retreat.

In Turkey, businesses are looking for new partners to increase exports to continental Europe, said Aysegul Arican, the coordinator of the Foreign Economic Relations Board, according to the Turkish Daily News.

The economic situation in Europe has limited sales, and Turkey is looking for both increased trade and foreign investment, he said.

"Turkey is focusing its efforts on increasing foreign direct investment in [research and development] in particular, Arican said.

"German, Dutch and British companies are among major investors in Turkey. But Turkey would like to attract more investors especially from Sweden, Finland, Norway, especially in the area of [information technology] and high technology, as well as R&D," he added.

The Turkish sovereign bonds due 2030 were also static at 154.125 bid, 154.6 offered.

Also in the Commonwealth of Independent States, Azerbaijan said it will allow Russian nuclear materiel to pass through on its way to Iran, according to the Itar-Tass News Agency.

Russia, Georgia face off

Meanwhile, Russia finished the deployment of an additional 1,000 troops into Georgia's Abkhazia region.

Tbilisi has accused Moscow of provoking a deepening rift between the two countries, with the new contingent of what Russia calls peacekeeping forces.

Both NATO and the U.N. have called for both sides to ease their rhetoric, but NATO has been more critical of a perceived breach of Georgia's sovereignty by Russia.

Before the latest round of deployments, Russia already had nearly 2,000 troops stationed in Abkhazia and 1,000 in South Ossetia.

Russian troops have been in the breakaway regions since shortly after the fall of the Soviet Union.

About 1,500 Georgian troops are in the area.

The Russian government bonds due 2030 were spotted unchanged at 115.35 bid, 115.45 offered.

Israel Electric prices $1 billion

In emerging Europe's time zone, Israel Electric (Baa2/BBB+) priced $1 billion 7¼% 10-year bonds at 99.831 to yield 7.275%, according to a market source.

The spread of Treasuries plus 350 bps came to the inside of the talk at Treasuries plus 375 bps.

Citigroup and Lehman Brothers acted as bookrunners for the Rule 144A and Regulation S deal.

Israel Electric is a Haifa, Israel-based state-run utility.

"I hear it did pretty well," a buyside source said.

Proceeding through the year, corporate issuance will hinge on external factors, particularly global default rates, a strategist said.

More than $37 billion of corporate deals have found their way to the calendar, mostly from the European sector and nearly the same amount expected in sovereigns, he said.

Also, the new issues are just as likely to be in dollars as this time last year, he said.

The disinterest in major currencies has taken a toll on the euro, which has been involved in only 12% of emerging market issuance this year compared to 22% during 2007, he said.

Low volumes stall LatAm rally

Very low volumes in Latin American trading left some wondering which way sentiment would head when the world comes back from holiday on Monday.

In Venezuela, a market source said that the recent rash of nationalizations and government steering of the economy are part of a plan to win popular support ahead of elections.

Although president Hugo Chavez walked away the loser from a referendum on wider socialism in December, individual actions seem popular with the electorate, the source said.

With Chavez's popular support as low as 26%, according to some polls, nationalizations may win back some voters, the source said.

The likely candidates to be scooped up by the government are perceived as part of the more strategic industries, including food production, housing and banking, the source added.

The 9¼% sovereign bonds due 2027 added 0.65 point to 92.15 bid.

In Brazil, the rally - built on the "long overdue" upgrade by Standard & Poor's to BBB- - calmed as the highly traded 11% bonds due 2040 added only 0.1 point to 136.9 bid, a syndicate official said.

The 7 1/8% bonds due 2037 slipped 0.3 point to 116 bid, 116.2 offered; however, the spread narrowed by 10 bps on Treasury action.

Elsewhere, in Bolivia president Evo Morales played a tune from ally Hugo Chavez's playlist as the government nationalized the telephone provider Entel SA as well as gas and oil interests.

"Basic services, call them energy, water or communications, cannot be in the hands of private business ... They are public services," he said on Thursday during May Day celebrations, according to the BBC.

Sucre agreed to pay $6.3 million for the controlling stake in Spain's oil firm Andina. The government took outright control of Empresa Petrolera Chaco SA from interests in the United Kingdom and Argentina.

It's a walkout

Meanwhile in Argentina, credits were pushed back down as farmers announced that "We have marked the end of the truce. We will start with gradual protests, without road blockades and without causing food shortages," said Eduardo Buzzi, head of the Argentine Agricultural Federation, according to the Buenos Aires Herald.

The farmers said they will protest the high export taxes, but they do not feel it is productive to do harm to ordinary people who have supported them, the report said.

The 8.28% Argentine discount bonds due 2033 lost 1.35 points to 81.3 bid.

Asia winds tighter

Asian spreads came in on weakness in Treasuries as credit prices dropped slightly through a session of paper thin volumes.

In the Philippines, the "financial system stayed on track toward sustainable growth despite the financial headwinds of rising world oil and commodity prices, subprime credit crisis and impending U.S. recession threatening to pose a drag on its otherwise steady course," the central bank said in its report on the second half of 2007.

Bank income was up 9.5% to PHP 62.9 billion in 2007, the bank said, although the peso's strength reduced the amount of carry lending.

Still, "the improving macroeconomic environment and continued upswing in consumer confidence on the back of strong inflows of overseas Filipinos remittances have led to double-digit expansion in 2007," the bank said.

The peso was seen trading at 42.241 to the dollar.

The Philippine sovereign bonds due 2030 dipped 0.375 point to 131.875 bid, 132.5 offered.

In Indonesia, workers held May Day demonstrations on Thursday in front of government offices demanding an increase in the minimum wage to 2 million rupiah from 1 million rupiah per month, the Jakarta Post reported.

One million rupiah is about $110.

"Our minimum wage is very low, while the prices of basic needs have skyrocketed, adversely affecting workers. Most of us are no longer able to make ends meet," a protestor said in the report.

The rupiah was seen trading at 9,220.93 to the dollar.

Many protests were mitigated by the celebration of Ascension Day on Thursday.

The Indonesian bonds due 2017 gave up 0.75 point to 102.5 bid, 103.375 offered.

In Pakistan, the senior judges fired by president Pervez Musharraf under the state of emergency will be reinstated on May 12 by act of parliament, according to Pakistan Muslim League chief Nawaz Sharif.

Crazy commodities

Also in Asia, Thailand proposed that it form a rice producer's cartel with Laos, Myanmar, Cambodia and Vietnam.

Thai prime minister Samak Sundaravej said on Wednesday that all five countries agreed "in principle" to the idea, reported the Bangkok Post.

"It's not a good idea, it's a bad idea. It will create an oligopoly and it's against humanity," said Philippines senator Edgardo Angara, according to the BBC.

As many countries struggle to import or preserve their own supplies, India and Vietnam have cut exports, which allowed rice prices to soar by 80% in the first quarter.

"Commodity prices are crazy at the moment," said a commodities analyst with expertise in emerging markets.

"That will probably go the same way as the Russian gas [cartel]," a strategist said about the 2007 Russian proposal.

"Anybody can produce rice," he said.

"Maybe [the United States] will join," he joked.

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