Emerging markets tighter with equities; Argentina leads high betas; CapitaCommercial prices, CAF talks

By Aaron Hochman-Zimmerman

New York, Jan. 24 - Emerging markets maintained Wednesday's recovery as prices looked stronger and spreads moved tighter.

"[Spreads] tightened significantly today," an emerging markets strategist said on Thursday.

There was "a decent amount of buying," he said, but it mostly was confined to the bellwether issues.

"Some people have put some cash to work ... small amounts.

"Still, we are going to have to see what evolves out of these [stimulus] packages and the Fed next week."

Argentina's high-beta discount bonds due 2033 led the way with gains of 1.25.

In the primary, Singapore's CapitaCommercial Trust Management Ltd. priced S$100 million while Venezuela's Corporacion Andina de Fomento released talk of Treasuries plus 235 basis points for its upcoming $250 million retap.

This week ending Wednesday, emerging market funds saw outflows of $170 million, according to EPFR Global.

"EM bonds didn't do too poorly, thanks to the EM local currency funds, the hard currency funds got slammed," a source at EPFR said.

"The EM bond funds fared much better than their equity counterparts ... $10.7 billion of outflows, second worst week since we started tracking flows weekly in 2000.

"Global and high yield bond funds also took it on the chin, but check out those inflows into money market funds where much of the $28 billion out of equity funds this week appear to have gone," he added.

Volatility bounced, but spent the whole day below Wednesday's close at 29.02. The VIX index closed lower by 1.24 at 27.78. The index is an often used measure of market volatility.

With stocks back in the positive, Treasuries were thrown back and emerging markets reeled in tighter by 30 bps to a spread of 255 bps, according to JP Morgan's EMBI+ index. The EMBI+ estimates the amount of extra yield investors will demand to keep money in emerging markets debt.

LatAm credits 'flying'

Relative to the beginning of the week prices in Latin America were "flying," a trader said.

"It's very strong, everything is 10 [bps] to 20 [bps] tighter," he said.

In news from the region, Argentina's energy crisis persists after a month of an ineffective government energy saving effort, a market source said.

A daylight savings program has been the cause of more confusion than energy savings, the source said.

Also, a program which had Edenor employees, along with police escorts, exchange high-efficiency light bulbs for older high-watt bulbs has been minimally effective, the source said.

Only 6,000 bulbs have been exchanged, the source said.

Without a solution the country may face a serious electricity supply problem, the source added.

Still, the 8.28% Argentine discount bonds due 2033 were up 1.25 to trade at 93.5 bid, 94.5 offered.

Venezuela will begin issuing bonds within the next few weeks in order to preserve the country's debt level for the year, finance minister Rafael Isea said, according to a market source.

Trouble with the U.S. economy is not yet cause for concern and his government could adjust if oil prices fall, Isea said.

President Hugo Chavez's main goal is to reduce the inflation rate of 22.5%, almost 10% higher than forecast, down to 11% which will be difficult, Isea admitted.

In trading, the Venezuelan 9.25% government bonds slipped 0.5 to 100.375 bid, 101.5 offered.

Brazil published its 2008 borrowing guidelines on Thursday.

The guidelines have changed little since 2007, a market source said, but they include pushing back the maturity dates of public debt and substituting floating-rate bonds for fixed-rate and inflation-linked securities.

The government also announced a sharp rise in the rate of destruction on the Amazon rain forest.

The rate of 1,250 square miles lost during the last five months of 2007 is unprecedented, according to a BBC report.

The government claims rising commodity and food prices are forcing farmers to clear more land for crops.

The Brazilian bonds 11% bonds due 2040 dropped just 0.1 to 134.3 bid, 134.4 offered. The 7.125% bonds due 2037 slid by 0.5 to 109.5 bid, 110 offered.

In Colombia, the central bank is expected to leave rates unchanged at 9.5% when it meets Friday, a market source said.

The Colombian bonds due 2017 were seen improved by 1.25 to approximately 109.75 bid, 110 offered.

Issuers jump in while they can

Issuers continued to set sail in calmer market waters as CapitaCommercial Trust Management Ltd. priced S$100 million three-year notes at a fixed rate of 3.15%.

DBS was asked to act as the bookrunner.

Capita is a Singapore-based real estate investment firm.

Corporacion Andina de Fomento (A1/A/A+) announced its intention to reopen its 5¾% notes due 2017 for the second time in the amount of $250 million.

Initial guidance was set at Treasuries plus 235 bps.

The original offer came at $250 million on Sept. 7, 2006 and was later reopened for another $250 million on Jan. 23, 2007.

The new retap would make the total amount $750 million.

Credit Suisse will act as the bookrunner for the deal.

Proceeds from the sale will be used for general corporate purposes.

CAF, which has headquarters in Caracas, Venezuela, is a multilateral regional bank for Andean development and integration.

China's ZTE Corp. announced it will offer a 4 billion yuan five-year bond with warrants.

The yearly interest rate of the bonds is expected to be between 0.8% and 1.5%.

Over 65 million warrants will be issued. Two warrants will bring one A share of ZTE.

ZTE is a Shenzhen, China-based telecommunications firm.

Also, the government of the Ukraine confirmed that it has intentions to issue more sovereign debt in the near future, a market source said.

The primary market should expect $25 billion to $30 billion of new issuance in 2008, compared to $35 billion in 2007, a market source said.

The bulk of issuance will come from the stronger and more stable issuers that will look to place longer-term bonds, often in local currencies, the source said.

Asia still climbing

Asian credits spent the second day in a row with a better sentiment and recovering spreads.

"We have a bit more stability," an emerging markets strategist said.

The International Monetary Fund warned the government of the Philippines not to lift the value-added tax on oil, the Manila Times reported.

The IMF feels that the loss of revenue would be too great and would leave the largest tax burden on the poor.

The Philippine bonds due 2030 fell 0.625 to 132.125 bid, 132.5 offered.

In Indonesia, biodiesel producers announced an 85% drop in production, according to the Jakarta Post.

Producers cited poor policies and the lack of subsidies for the slowdown.

As a result, fuel provider Pertamina has cut the use of biofuel in Biosolar and Biopertamax to 2.5% from 5%.

The biofuel program has cost the company $1.8 billion.

The Indonesian sovereigns due 2018 traded flat at 102.5 bid. The sovereigns due 2038 saw gains of 0.75 to 105.25 bid.

While attending the economic conference in Davos, Switzerland Pakistan's president Pervez Musharraf asked the world to judge his country based on economic growth and on its fight against terror rather than its human rights record.

He also made assurances that upcoming elections will be free and fair.

The Pakistani bonds due 2017 added 1.5 to trade at 83.5 bid.

"There was some positive news," a trader said about the Pakistani issues which posted the gains after a long stint at 82 bid.

"People were more comfortable with the credit," he said, adding that the market spent its second day with a better overall tone.

In corporates, China's Greentown bonds fell after rumors of a bond issue were dispelled, a market source said.

The company said it does intend to issue new debt, but will wait for more favorable market conditions.

The land developer is not pressed for liquidity, the source said.

It is estimated to have 2 billion yuan in cash along with a bank facility which is sufficient for its 2008 operations, the source said.

Emerging Europe tightens on better tone

Trading remained on stable ground for another day in emerging Europe.

Spreads were seen tighter as investors stepped out from hiding with cash in hand.

Liquidity is still scarcer than two weeks ago, a market source said, and the market is still closely fixed to equities' lack of direction.

Turkey and Sudan agreed to greater economic collaboration at a summit hosted by the Turkish foreign economic relations board, the Turkish Daily News reported.

Sudanese president Omar Hassan al-Bashir, who is widely blamed for the genocide in Darfur, said Turkish companies played a large part in Sudan's development programs.

Al-Bashir said that trade must be increased to $1 billion in the future. Trade between the two increased to $220 million from $48 million between 2002 and 2006.

The Turkish sovereigns due 2030 posted gains of 0.625 to trade at 156.125 bid, 156.375 offered.

In Russia, energy minister Viktor Khristenko is expected to sign an agreement with Serbia on Friday to solidify cooperation between the two countries' energy sectors, the Itar-Tass News Agency reported.

The South Stream pipeline will reportedly use Serbia as a hub.

Also, VTB Bank's profits are expected to hit $1.4 billion in 2007, a 25% increase from 2006, a market source said.

The bank has obtained a license to operate in both India and China, but says it will put more emphasis on domestic investment banking, the source said.

The Russian sovereigns due 2030 dropped by 0.375 to trade at approximately 115.125 bid, 115.625 offered.

In the Ukraine, state energy firm NAK Naftogaz Ukrayny asked its bondholders to allow it more time to file accounts in order to avoid defaulting on $500 million of bonds due 2009, a market source said.

The Ukrainian government has earmarked $2.4 billion in order to support Naftogaz in case of default.

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