Fed minutes offer no help to emerging markets credit; Ecuador jumps on rating upgrade; primary frozen

By Aaron Hochman-Zimmerman

New York, Nov. 20 - Emerging markets continued to waffle in a shallow and illiquid market Tuesday.

Bonds crept higher with equities in the morning as investors were hopeful about the minutes release from the Federal Reserve Board.

The minutes discussed a downgraded U.S. growth projection which "should probably be quasi-bond market friendly," a syndicate official said.

Still, bonds have followed equities very closely, the official said.

Equities managed to end the day on the positive side after the Fed report, but "we still have a pretty significantly flight to quality" in the bond market, the official said.

Thursday's Thanksgiving holiday in the United States is adding to it, but you still have the same negative rumors, including further talk of Countrywide going bankrupt, the official said. Countrywide denied it had liquidity problems.

"I can feel myself generally becoming more bearish about the world," a trader said.

Even during recent weeks which were uninterrupted by holidays "you can feel the fatigue on Tuesday and Wednesday, not just Friday," he said.

The primary market was clearly showing Tuesday fatigue.

"You wouldn't announce a deal in this environment," the syndicate official said.

"Sovereigns are the one exception that may possibly get done," the official said, referring to the team which was able to bring the Ukraine's deal on Nov. 7 and the bonds from the City of Kiev on Monday.

Deals can get done if the issuers are willing to pay for it, the official said.

The market tone may have been acidic, but one piece of good news shown through.

Ecuador was given a two-level upgrade by Standard & Poor's to B- from CCC.

The country's high-beta sovereign saw investors use the cheery headline as a launch pad to add 2.5 in gains.

Commodity prices have played a role in boosting revenues for the oil-producing country, and oil was seen over $98 per barrel at the end of Tuesday's session.

Volatility was as high as 27.35 on the day, but finished lower by 1.13 at 24.88, according to the VIX index. The index is the accepted measure of market volatility.

As a sector, emerging markets moved to a tighter spread, according to JP Morgan's EMBI+ index. The index, which calculates the amount of extra yield investors demand to hold emerging markets debt, tightened by 4 basis points to a spread of 241 bps.

However, the syndicate source was cautious about placing undue importance on the index, which only represents sovereigns, not the entire market.

Despite equity jump, emerging Europe struggles

Equities in the United States bounced in early trading based on speculation about the contents of the Fed minutes, but it did not do much to help trading in emerging Europe.

There was "a little more weakness" in the market on Tuesday, a trader said.

The trader wonders whether the market will continue to follow what he describes as a "ball bouncing down the stairs pattern."

"Maybe the market is going to pop," he said, but the erratic character of the secondary "hasn't convinced me to do anything," he said.

For the first time in a while, even the traditionally strong corporates in Russia were starting to show some weakness, he said.

"They're not materially trading down," he said, but they are showing signs of sluggishness.

OJSC Vimpelcom's issue due 2016 was seen down 1 at 101.5 bid, 102.5 offered.

The benchmark Russian sovereign due 2030 was seen unchanged at 112.687 bid, 112.75 offered.

The City of Kiev's new $250 million five-year bond, priced at par to yield 8¼% on Monday, declined slightly to 99.875 bid, 100 offered.

In Turkey, the benchmark bonds due 2030 were quoted 0.50 lower to trade around 112.125 bid, 112.25 offered.

LatAm trips, Ecuador flies

Latin American trading saw its early gains slip away with equities as the release of the Fed minutes did nothing for bond-trader confidence.

Investors also had to swim through light liquidity as the Thanksgiving holiday shortened the week in the United States.

Venezuela's 9.25% sovereigns due 2027 were spotted unchanged at par.

Brazil's highly-liquid 11% bonds due 2040 slipped 0.15 to a bid of 133.8, and the bonds due 2037 were down just 0.10 to a bid of 112.55.

Argentina's discount 8.28% government bonds due 2033 posted gains along with Ecuador. The securities were up 0.50 to trade at a bid of 93.35.

Ecuador's ratings boost added 2.5 to its sovereigns due 2030 which were seen at a bid of 93.375.

Asia pushed lower

In trading, negative sentiment was easier to find than liquidity on Tuesday and Asian credits finished generally lower even as stocks finished the day pointing up.

Meanwhile, the leaders of the 10 members of the Association of Southeast Asian Nations (Asean) gathered in Singapore to sign an agreement which is intended to enforce human rights and pave the way to greater economic ties and open trade in the vein of the European Union.

However, president Gloria Arroyo of the Philippines said her government may not accept the agreement if the leaders of Myanmar do not restore democracy.

The member countries of Asean are Brunei, Cambodia, Indonesia, Laos, Malaysia, Burma, the Philippines, Singapore, Thailand and Vietnam.

The Philippines' government bonds due 2030 were spotted at a bid of 134.375.

Indonesia, which hosts the headquarters of Asean in Jakarta, saw its benchmark sovereigns due 2017 lose 0.5 to a bid of 103.

In Pakistan, the government has set free approximately 3,400 political prisoners who were arrested during the ongoing state of emergency which was declared by president Pervez Musharraf on Nov. 3.

Many more are still held by police and more arrests are being made, but the release of an additional 2,000 has been promised.

Former prime minister Benazir Bhutto, who had formerly been placed under house arrest, held a meeting to discuss a possible boycott of the elections expected on Jan. 8.

Dry market seizes pipeline

The primary market had nothing to offer on Tuesday other than a look to the long-term calendar and a hope that liquidity and sentiment will allow deals to begin printing before the end of the year.

China's Agile Property Holdings will try again next week to price its $400 million senior notes (Ba3/BB) in a fixed- and a floating-rate tranche.

HSBC will act as the bookrunner.

Egypt's new local-currency sovereign (Ba1/BB+/BB+) will be offered through HSBC and Merrill Lynch, but will wait until 2008 to price.

Venezuela's Corporacion Andina de Fomento has already issued talk of yen Libor plus 30 to 37 bps for its three-year samurai bond through the Nomura Group.

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