Emerging markets hit; credit tensions easing; Argentina rocked, discount bonds decline 3.25 points

By Aaron Hochman-Zimmerman

New York, Oct. 20 - For most emerging market credits the week began on the retreat, but a number of outperformers were able to break through on Monday.

In general "everyone's taking hits across the board," a syndicate official said.

Argentina burrowed to new depths as its debt swap program seemed less and less able to swim in the light liquidity.

The benchmark discount bonds due 2033 fell another 3.25 points to 35 bid.

Despite the battering of Argentina, the sentiment regarding the general health of the credit market began to lift slightly.

"Libor rates are going down and the TED spread is narrowing," a trader said. "There's a little bit of a thaw in credit markets."

As tensions were eased, volatility sank severely. The VIX index dropped 17.36 to end at 52.97. The index is a frequently used gauge of market volatility.

Argentina finds new low

In Argentina, bonds were walloped as investors continued to lose faith in the proposed bond swap.

The government hoped to exchange between $4.5 billion and $7.5 billion for guaranteed loans.

The value for the exchange would have been very strong, "pennies on the dollar," if the liquidity was available, a syndicate official said.

Rather, talk on Monday centered abound "de-privatizing the pension funds," the official said.

What amounts to a nationalization of pension funds is intended to rescue them as "they're losing so much value," he said.

If the funds become insolvent, strikes and further political unrest will certainly follow, he said.

The 8.28% Argentine discount bonds due 2033 dropped 3.25 points to an all-time low at 35 bid, while the five-year CDS crossed the 3,000 bps mark for a time, but retained a 400 bps differential as it came off the wides.

LatAm follows lower

In the rest of Latin America, credits continued to be dragged lower by a slow, illiquid market.

In Venezuela, repairs to the power grid are underway after millions of people lost power after blackouts hit large swathes of the country, including Caracas.

The power system is entirely under government control, but president Hugo Chavez insisted that the government's management is not to blame for the faults.

The 9¼% Venezuelan government bonds due 2027 were seen lower by 1.25 points at 57 bid.

However in the high-beta world, Brazil's highly traded 11% bonds due 2040 added 0.45 point to 112.75 bid.

Asia finds afternoon daylight

Asia held onto overnight weakness through the morning but was able to follow equities into a rally pace late in the afternoon, a trader said.

South Korea made the big news over the weekend by following western governments with a $130 billion banking bailout.

Still, "I didn't see a massive amount of follow through," a trader said.

The South Korean five-year CDS stretched wider by 10 bps to 385 bps bid, 415 bps offered.

In the Philippines, the central bank opened a dollar repurchase agreement facility to assist the country's financial system, the bank said in a press release.

In light of the global credit freeze, "this will help ensure the ready availability of credit for imports and other qualified funding requirements," the bank said.

The bank also approved foreign-denominated sovereign debt securities for use as collateral.

The Philippine government bonds due 2030 fell 2 points to 102 bid, 105 offered.

Meanwhile, Indonesia's sovereigns due 2018 added 3 points to 67 bid, 72 offered.

Also in Asia, India's central bank cut the short-term repurchase rate to 8% from 9% on Monday.

The cut, which takes effect immediately, allows the central bank to put more capital into private banks in order to ease the credit crisis.

The rupee was seen trading at 48.955 to the dollar.

Emerging Europe falls

Emerging European credit fell in contrast to strong equities on Monday.

Talk of an easing of the credit crunch was not enough to support the prices of sinking bonds in politically volatile emerging Europe.

In Russia, the central bank was scheduled to offer up to 700 billion rubles to banks at an 8.5% interest rate until Nov. 24, the Itar-Tass News Agency reported.

An unnamed source told Itar-Tass that 122 banks would be offered a chance to bid on the unsecured loans.

Also, Russian deputy prime minister Sergei Ivanov said the navy will permanently leave Ukraine's port of Sevastopol in the Crimea by 2017 if it is not invited to stay, the BBC reported.

Many Russian nationalists in Ukraine showed support for Russia and its fleet, but pro-Western forces currently dominate the government.

The Russian sovereigns due 2030 were quoted at 85.5 bid.

Meanwhile in Ukraine, prime minister Yulia Timoshenko asked the parliament to continue its work despite an order of dismissal from president Viktor Yushchenko.

In a concession to Timoshenko later in the day, Yushchenko who was pushing for new elections on Dec. 7, rescheduled the vote for Dec. 14 and allowed parliament to resume limited meetings.

Timoshenko has been in hot and cold negotiations with Yushchenko over presidential powers and the country's financial relationship with Russia.

Trial sparks tension in Turkey

Elsewhere in Turkey, 86 people went on trial for charges ranging from plotting the overthrow of the government to aiding a terrorist organization, reports said.

While protestors shouted inside and outside the courtroom in support of the group known as Ergenekon, the judge ordered out everyone but the suspects and lawyers.

The suspects were made up of retired military officers, journalists and professors accused of conspiracy to murder a judge as well as an attack on a secular newspaper, which was intended to provoke military rule.

Many believe that the trial will spark new tensions between the religious leaning AK Party and the secular military.

Turkey also posted a draft 2009 budget that called for a 13.3 billion lira deficit.

The 2009 inflation target was set at 7.5% compared to 4% for 2008.

The lira was seen trading at 1.506 to the dollar.

The Turkish government bonds due 2030 were seen at 124 bid.

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