EM spreads stretch wider on Treasury rally; high betas lose; Gabon announces debut offer

By Aaron Hochman-Zimmerman

New York, Nov. 26 - Emerging markets continued last week's downward spiral with lower levels in trading and strong risk aversion in the primary.

Prices were generally down by 0.25, a portfolio manager said, and spreads widened approximately 20 basis points as Treasuries rallied.

In trading, the question is not of bright spots, but of "which are the most defensive trades," said Lehman Brothers' head of emerging market research Guillermo Mondino.

"The direction is pretty unequivocal and uniform," he said of emerging market trading.

"It's not very clear that there are many safe spots out there," he said, although the lower-beta credits such as Russia and Brazil may provide more stability.

In Monday's session, the Russian sovereigns due 2030 posted gains along with some of the other benchmarks as they added 0.25 during the session.

On the losing side, it was Argentina leading the retreat, dropping 1.25 from its discount bonds due 2033.

The primary market began the week with a step backward.

The United Arab Emirates' Dubai Electricity & Water Authority pulled its benchmark-sized senior unsecured three-tranche offering.

"It's not a very bright outlook for the next couple weeks," Mondino said.

But on a more positive note, the Republic of Gabon announced an upcoming debut sovereign that will be denominated in dollars.

Many investors, some expecting a rate reduction, are anxiously awaiting the Dec. 11 meeting of the Federal Reserve Board.

"I think a lot depends on what happens between now and then," the portfolio manager said about the likelihood and amount of a rate cut.

He still expects an easing of rates by "a minimum 25 [bps]."

Along with falling prices in emerging markets, oil dropped down to $97 per barrel and equities as measured by both the Dow Jones Industrial Average and the S&P 500 were off as well.

Headed in the opposite direction to oil and equities was volatility, which rocketed 3.30 to finish the day at 28.91, according to the VIX index. The index is the widely accepted measure of market volatility.

Emerging markets widened significantly as Treasuries climbed. JP Morgan's EMBI+ index was seen wider by 17 bps to a spread of 277 bps. The index calculates the amount of extra yield investors demand to keep money in emerging markets debt.

High-betas lose again in LatAm

On a risk averse Monday, some of the low-betas were able to hold flat, but the high-betas continued the trend of losing ground in Latin America.

"The day hasn't been particularly good," said Lehman's Mondino, who added that the region's high-betas were generally wider by 15 bps.

But "it hasn't been a meltdown," he added.

Argentina's high-beta 8.28% discount bonds lost 1.25 to trade at 9.25 bid, 9.5 offered.

Venezuela has frozen its ties with Colombia over failed negotiations for hostages held by the Colombian rebel group, the FARC or the Revolutionary Armed Forces of Colombia.

President Alvaro Uribe of Colombia ended Venezuelan president Hugo Chavez's role as a negotiator between the FARC and Bogota for what Uribe felt was a lack of impartiality.

Before the impasse Caracas was considering rejoining the Andean Community of Nations trade bloc of which Colombia is a member, but now Chavez said membership is no longer under consideration.

Venezuela left the Andean Community of Nations last year after it joined forces with the Mercosur trade bloc led by Argentina and Brazil.

The 9.25% Venezuelan sovereigns due 2027 were seen down 0.5 to trade at 97.25 bid, 98 offered.

The Colombian bonds due 2037 were quoted at 109 bid, 110 offered.

Brazil's low-beta but high-volume 11% bonds due 2040 were unchanged at 132 bid, 133 offered.

Emerging Europe scrapes up slight gains

Emerging Europe's traditionally stable market held firm against a negative current felt throughout much of emerging markets.

Turkey saw slight gains of 0.2 in its government bonds due 2030. The issue was quoted at 156.2 bid, 156.5 offered.

In Russia, ahead of the Sunday's parliamentary elections, president Vladimir Putin blamed the United States for disrupting the work of election observers from the Organization for Security and Co-operation in Europe (OSCE).

Initially the OSCE claimed it would not review the elections because its monitors were denied Russian visas, but Putin has said the OSCE was improperly influenced by the United States in order to "discredit" the elections.

Putin said the decision not to monitor the elections came "on the recommendation of the American State Department. We will take this into account in our inter-state relations."

"The decision was not made in consultation with any government. It was made on operational, not political grounds," OSCE spokeswoman Urdur Gunnarsdottir said in a BBC report.

The Russian sovereigns due 2030 were spotted up 0.25 at 112.5 bid, 112.75 offered.

Asia shows mild progress

Indonesia and the Philippines recently suffered natural disasters in the form of an earthquake and a typhoon, but their benchmark issues did not show any damage from what the portfolio manager called "a pretty choppy day."

The Philippines government bonds due 2030 were up 0.625 to trade near 130.625 bid, 131 offered.

In Indonesia the sovereigns due 2017 were seen up 0.25 at 102.25 bid, 103 offered.

In Pakistan, president Pervez Musharraf is expected to shed his role as army chief Wednesday and accept another term as president on Thursday.

Still, opposition leader and former prime minister Nawaz Sharif, who recently returned from exile, threatened to lead protests against Musharraf if the state of emergency is not repealed.

If events proceed as the government has indicated, Lt. Gen. Ashfaq Pervez Kiani will take over operational command of the army, but Musharraf will still act as commander-in-chief.

The Pakistani government bonds due 2016 were lightly traded at 81 bid, 85 offered.

Primary losses one, adds one

The primary market is seen as a road under construction by many market watchers.

Investors often refer to last August as a benchmark to describe the current lack of liquidity and glut of risk aversion.

"Liquidity is so poor I would be absolutely shocked if anything priced," the portfolio manager said. "Shocked."

Still, the Republic of Gabon announced on Monday it plans to sell a debut sovereign (/BB-/) denominated in dollars.

"Good luck," the investor said, adding: "Not until the market settles down."

The current environment was too hostile for Dubai Electricity & Water Authority which announced the postponement of its benchmark-sized senior unsecured three-tranche offering (A1//AA).

The deal included a five-year floating-rate sukuk, a five-year fixed-rate conventional bond and a 10-year fixed-rate conventional bond.

All of the notes were to be denominated in dollars.

Barclays, Citigroup, Dubai Islamic Bank were bookrunners.

DEWA is a Dubai-based utility company.

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