Emerging markets strengthen again; new liquidity in market; spreads wrap tighter; Turkey bonds rise

By Aaron Hochman-Zimmerman

New York, Oct. 30 - Emerging markets continued advancing as liquidity noticeably returned to the market.

Throughout the week, investors cautiously noticed improving bid-offer spreads, but on Thursday "it's actually gotten better," said Enrique Alvarez, a Latin America debt strategist at think tank IDEAglobal.

Spreads were seen closer to 1.5 points to 2 points, which is not perfect, "but that's much better," he said.

In trading, emerging Europe performed well on Thursday as usually battered Turkey posted a 7-point gain for its benchmark bonds due 2030.

Despite the short-term success, many investors remained bearish in the long term.

"We expect it to carry on to year's end," a trader said of the illiquidity and extreme volatility.

Still, during the session volatility dropped by 7.06 to 62.90, according to the VIX index. The index is a common measure of market volatility.

Emerging markets continued to build steam toward recovery as spreads narrowed by 77 basis points to a spread of 655 bps, according to JPMorgan's EMBI+ index. The EMBI+ estimates the amount of extra yield investors will demand to hold assets in emerging market debt.

Buyers come back to emerging Europe

In emerging Europe the mood continues to ease even as bid-offer spreads remained a problem.

"There is more buying now," a trader said, by "people trying to get in at cheap levels."

"People want to find attractive yields," he said.

Still, many of the sellers are reluctant.

"They don't want to sell, but they have to," he said.

If it is possible, "we tell the people 'don't do anything,'" he said.

In Russia, after the announcement that national oil firm OAO Gazprom will sell its financial arm, Gazprombank, the bank reported that it has repaid its outstanding $1.05 billion 7¼% eurobond, according to the RIA Novosti News Agency.

The issue came as a $750 million bond on Oct. 30, 2003 with a $300 million add-on in 2004.

The Gazprom bonds due 2034 were quoted at 73 bid, 78 offered.

The Russian government bonds due 2030 jumped by 4.5 points to 85 bid, 87 offered.

In Turkey, the central bank suspended its foreign exchange auctions in light of "the recent favorable developments in global markets," the bank said in a statement.

As a response to "unhealthy price formation" in currency markets, the auctions began on Oct. 24.

Over the two auctions that were held, a total of $150 million was sold.

The auctions will be resumed if conditions warrant, the bank said.

The Turkish sovereigns due 2030 launched up 7 points to 118.5 bid, 123.5 offered.

LatAm keeps rally 'rolling'

In Latin America "they're all rolling," IDEAglobal's Alvarez said.

With few exceptions, credits have posted a winning streak over the course of the week, he said.

In Brazil, "people are cheering the swap lines," he said about the $30 billion liquidity injections from the Federal Reserve into the central banks of Brazil and Mexico.

The 7 1/8% Brazilian government bonds due 2037 tacked on 2.25 points to 89 bid, 90.75 offered.

Among the high-betas, "you've got to separate them out," he said.

"Venezuela is coming back due to a slight bounce in crude," he said, and "it's the one that's least likely to default due to the fact that they have so much oil."

Light sweet crude traded as high as $70 per barrel.

The 9¼% Venezuelan sovereigns due 2027 jumped 3 points to 59.5 bid, 62 offered.

Elsewhere, "Argentina is still relatively weak with no pick up in price there," he said.

The 8.28% Argentine discount bonds due 2033 added 1.25 points to 23.75 bid, 24.25 offered.

Ecuador sliding toward cliff

"Ecuador is the one that has imploded," Alvarez said.

The decision to default depends on whether president Rafael Correa and his government favor social spending or debt servicing.

"It's a political decision," he said.

The problem is a function of sinking oil prices.

The country's 2009 budget planned for $80-per-barrel oil, he said, but at a price of $70 per barrel, the country only receives $50 per barrel.

"They're about $30 under water," he said.

Still, "[Correa] is smart enough to figure, if he does pull the trigger on default that will be the second default in about 10 years," he said.

Figuring in the possible length of the global recession, "he won't get anything in three or four years," he said.

By that math, Alvarez currently places the odds of default at 30%.

The 8% Ecuadorian sovereign bonds due 2030 were unchanged at 28 bid, 32 offered.

Asia improves as cash flows

Asia performed well with tighter spreads and better liquidity as money filtered in from the Fed.

Central banks in South Korea and Singapore were each handed $30 billion in liquidity thanks to the liquidity swap facilities, which helped to recharge Latin America.

In the Philippines, a new inflation forecast for October put the range between 11.3% and 12.1%, said central bank governor Amando Tetangco, according to the Manila Times.

Lower commodity and energy prices may help push inflation below the September level of 11.9%, Tetangco said.

Year to date, average inflation stands at 9.2%, which is on the low side of the 9% to 11% range predicted for the year.

Still, the 2008 numbers are significantly higher than the 2007 inflation average of 2.9%, the report said.

With respect to interest rate policy, "Right now, we are on neutral stance," Tetangco said, adding that the recent rate cut in the United States will serve to improve the peso.

The peso was seen trading at 48.4 to the dollar.

Also in Indonesia, a crude palm oil power plant began operation under a pilot program maintained by state energy firm PT PLN, according to the Jakarta Post.

The 10 megawatt plant claims to be the only biofuel energy producer in the region, the report said.

The program, which uses locally grown palm, was mandated by the government to reduce energy imports.

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