Emerging markets rally to close; Fed cut spikes prices; spreads wider on sinking Treasury yields

By Aaron Hochman-Zimmerman

New York, Dec. 16 - Emerging markets held flat for most of the day, but prices were lifted with the rising market tides in the wake of the 75-basis-point interest rate cut from the Federal Reserve.

The emerging markets themselves "were not doing a whole lot," said Enrique Alvarez, a Latin America debt strategist at think tank IDEAglobal.

"There's sort of a rebalancing bounce," he said after the Fed eased rates to historic lows and prices were "dragged along" by a huge drop in the 10-year and 30-year U.S. Treasury yields.

In trading, Ecuador's 8% bonds due 2030 held up better than the defaulted bonds due 2012 and the bonds due 2015, which have payments due shortly.

The 8% bonds traded at 23.25 bid.

After the rate cut, U.S. equities surged late in the day and made a run for 9,000 on the Dow Jones Industrial Average but came up just short.

The rally still served to sink volatility by 4.39 to 52.37, according to the VIX index. The index is a common measure of market volatility.

Treasury yields sank to fresh lows as emerging market spreads were pulled wider by 6 bps to a spread of 755 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.

The EMBI global diversified index, which represents sovereigns and quasi-sovereigns, was wider by 8 bps with a spread of 804 bps.

The diversified index has a less strict liquidity rule for inclusion.

LatAm bounces, Ecuador flat

Latin America took a bounce from the sharp rate cut by the Federal Reserve on Tuesday.

However, Ecuador "went down the tube a few days back," and "it's not coming back," a strategist said.

People will "sit and wait ... until the Correa Administration comes back and says 'we will offer you this,'" he said.

The 8% Ecuadorian bonds due 2030 were slightly elevated as they are not technically in default like the 12% bonds due 2012.

The 8% bonds were quoted at 23.25 bid, 24.5 offered.

Meanwhile, Venezuela was dealing with sinking oil prices as many investors assumed an OPEC oil cut on Wednesday would not be drastic enough to impact the cost of oil.

Light sweet crude was seen trading as low as $43 per barrel, and the 9¼% Venezuelan bonds due 2027 slipped 0.25 point to 54.25 bid, 56.5 offered.

Elsewhere in Latin America, bonds held up well.

Argentina's 8.28% discount bonds due 2033 added 0.5 point to 27.5 bid, 28.75 offered.

Brazil's 7 1/8% bonds due 2037 jumped 2.25 points but kept a high bid-offer spread.

The bonds were seen trading at 101.5 bid, 105 offered.

Asian sentiment strong, low flow

Asian credit was firm as the United States cut rates close to zero, although low volumes precluded any serious buying.

"It improved sentiment," a strategist said.

In Indonesia, manufacturing production will slow its growth in 2009 to the range of 3.6% to 4.6%.

The range falls short of the 4.8% target, according to industry minister Fahmi Idris, according to the Jakarta Post.

"This crisis will have a direct impact on the manufacturing sector," he said about the global financial conditions.

The government has set aside $1.1 billion in aid to the industrial sector, and "the government is also relaxing export market regulations to help boost exports," Fahmi said.

The Indonesian sovereigns due 2017 were seen at 75 bid, 82 offered.

Philippines will wait to issue

The Philippines will wait to return to the international debt market, the Bureau of Treasury told the Manila Times.

The Philippines had scheduled $1.5 billion in debt issuance for 2009, compared to $500 million in 2008.

"We will try to access early when market conditions are right," treasurer Roberto Tan said in a statement.

The government is also seeking $1.1 billion in aid from non-governmental lenders such as the World Bank or Asian Development Bank.

The Philippine sovereign bonds due 2030 were quoted at 107 bid, 111 offered.

Emerging Europe mixed

Low volumes held prices steady in emerging Europe even as Treasuries dragged spreads wider.

In Russia, the state-owned Russian Venture Co. has amassed a total of $576 million in venture capital held in four sub-funds, the RIA Novosti News Agency reported.

Russian Venture has more than $1 billion in charter capital.

The money slated as venture capital is intended to support entrepreneurial innovation within Russia and remain competitive in the venture investment world, the report said.

Also, Russia and Belarus are close to resolving an oil contract for 2009, said Belarussian first deputy prime minister Vladimir Semashko, according to the Itar-Tass News Agency.

"This issue should be resolved before the end of the year," Semashko said.

Semashko also brushed aside rumors that Belarus would pay as much as $240 per 1,000 cubic meters of gas.

The Russian sovereign bonds due 2030 were spotted at 80.625 bid, 82.5 offered.

In Turkey, central bank governor Durmus Yilmaz denied that the runaway inflation the country faced in 2007 and 2008 was due to monetary policy, the Hurriyet Daily News.

The cause was global and out of the central bank's power to control, he said.

"The first shock Turkey faced with its inflation targeting policy was in May 2006 when the global capital conditions started to worsen affecting emerging markets, and capital outflow was seen in many countries including Turkey," he said.

The problem was compounded by rising commodity prices in 2007, he added.

The monetary policy committee is scheduled to meet to consider a rate cut to the 16.25% borrowing rate and the 18.75% lending rate.

Discussions are also ongoing with the International Monetary Fund over a possible $20 billion to $40 billion standby arrangement.

The lira was seen trading at 1.541 to the dollar.

The Turkish government bonds due 2030 were seen at 136 bid, 138 offered.

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