Emerging markets firm up; high-betas gain ground; primary hushed after Petrobras pulls offering

By Aaron Hochman-Zimmerman

New York, Feb. 12 - Emerging markets were in better shape Tuesday with stronger prices and slightly better volumes.

"I don't know. I think that the market is a little bit better," a syndicate official said.

However, "I think it's too soon to tell," he said.

"There isn't a hell of a lot of liquidity out there," he added.

"Everything's up," he said, but "what we need is stability" rather than a "gangbuster" day followed by "three [crappy] days," he said.

The market "was due for a little bit of a bounce," a portfolio manager said, offering stocks the acclaim for helping boost credits.

The primary market fell silent again in the wake of the pulled $500 million deal from Brazil's Petroleo Brasileiro SA.

In the secondary, the day's big winner was Brazil, which saw its bonds due 2037 jump by 1.25.

Headlines helped equities, and therefore credits, as Warren Buffett's $800 billion offer to back the monoline insurers added some investor confidence, while the Federal Reserve's $30 billion auction injected liquidity into drying U.S. banks.

The $30 billion in 28-day credit was lent at 3.01%, according to the Federal Reserve's web site.

"The volatility recovered a little bit," a syndicate official said.

Volatility opened low but crept up into the afternoon to close lower by 1.27 at 26.33, according to the VIX index. The index is a frequently used measure of market volatility.

Treasuries stepped back as equities were climbing, which allowed emerging markets the chance to tighten by 4 basis points to a spread of 282 bps, according to JPMorgan's EMBI+ index. The EMBI+ determines the amount of extra yield investors require to hold assets in emerging markets debt.

Equities power emerging Europe

Trading in emerging Europe saw volatility and some volume return as prices managed to stay mixed.

Thanks in part to Buffett's $800 million offer to salvage the stumbling giant bond insurers, the market opened up for investors who were ready to buy new paper, a portfolio manager said.

Meanwhile, presidents Viktor Yushchenko and Vladimir Putin reached an agreement in Moscow to keep gas flowing from Russia into Ukraine on Tuesday.

The 11th-hour agreement stipulates that Kiev will pay debts accrued last November and December at last year's rates beginning on Thursday.

At the meeting, the two heads of state also discussed Ukraine's desire to join NATO.

Putin admitted he could not prevent the Ukrainian overtures to the west but said: "I draw your attention to the consequences that would follow. It is terrible to even think that in response to this... Russia cannot theoretically exclude aiming our offensive missile systems at Ukraine."

The Ukrainian sovereigns due 2016 fell 0.45 to 99.25 bid, 100.5 offered.

Elsewhere, Russia's VTB Bank opened its first office in India.

"Reliable banks like VTB should more actively work on international markets," prime minister Viktor Zubkov said at the opening ceremony in New Delhi, according to the Itar-Tass News Agency.

Also, arrangements were made for Russia to build four nuclear power plants in India by 2020.

Future economic cooperation is expected to double the approximate $5 billion to $6 billion of trade volume between the two surging economies.

The Russian sovereign bonds due 2030 gained only 0.05 to trade at 114.5 bid.

Turkey's potential membership in the European Union has created €16 billion in foreign investments, reported the Turkish Daily News.

More is expected as the Turkish economy is expected to grow at a rate of 5% to 7%, the report said.

However, the report notes that French firms have lost contracts to companies in other E.U. nations due to the unenthusiastic French response to Turkey's request for membership.

The Turkish government bonds due 2030 were spotted better by 0.2 at 154.125 bid, 154.5 offered.

Firmer LatAm 'not there yet'

Latin American trading tightened on Tuesday as strength in equities spurred some confidence in the market, a syndicate official said.

Still, "we're not there yet," he said, hoping for more consistency in the market.

"Argentina and Venezuela are kind of bouncing back from the netherworld after having got hit pretty hard the last few days," a portfolio manager said.

Brazil's sovereigns improved on Tuesday after the state-oil company, Petrobras, withdrew its offer of a $500 million retap on Monday.

"I guess even the big boys get cut down," a syndicate desk official said after the news of the withdrawal.

"They didn't want to pay the appropriate new issue premium ... I had heard they were only offering 10 bps at [Treasuries] plus 210 bps, and had gotten as wide as [Treasuries] plus 235 bps, but by that time the book was struggling," he said.

High-grade borrowers are paying 35 [bps] to 50 bps new issue premium; my take is that had they gone out at 235 [bps] from the get go, it would have gotten done, as I believe there is value there," he said.

"I think they'll come back in at some point but it's not going to get any cheaper; by then [pricing] could be closer to 275 [bps]," another market source said.

When Petrobras returns to retap the bonds due 2016, the offer will not be as wide as Treasuries plus 275 bps "unless the bond gaps out to 240 [bps]," the syndicate official said.

Brazil's 11% government bonds due 2040 were up 0.3 to 132.85 bid. The 7 1/8% bonds added 1.25 to trade at 106.25 bid.

The 8.28% Argentine discount bonds due 2033 were higher by 1 point to trade at 89.5 bid.

The 9¼% Venezuelan sovereign bonds due 2027 were up 0.7 to 98.95 bid.

Mexico's 5 5/8% bonds due 2017 were up slightly by 0.03 to 102.8 bid.

Asia hitched to stocks

Asian trading was "pretty firm in the morning," a trader said.

Market watchers "saw a reasonable amount of risk getting put to work, in both cash and CDS," he said.

In the later part of the session on Tuesday, "we're seeing spreads backtrack pretty quickly," he said, although "we're still tighter on the day."

The high-betas were tighter by about 5 bps, he said, but the entire market was retreating into the last minutes of the session.

"It's trading in a hurry with stocks," he said. "It's very choppy and very uncertain."

In the Philippines, merchandise exports hit a 10-month high in December but still fell short of 2007 expectations due to a strong peso, the Manila Times reported.

The exports grew by 21% to near $4.5 billion, compared to $3.7 billion in December 2006, according to the National Statistics Office web site.

The growth in merchandise put the total 2007 export growth rate at 6.1%, lower than the expected 8% growth.

The Philippine bonds due 2030 lost 0.625 to trade at 130.25 bid, 131 offered.

In Indonesia, the government is considering a proposal to allow government-run PT Danareksa to act as a holding company for the banks, which the government holds a majority stake, according to the Jakarta Post.

Due to central bank rules, private and public interests may not own the majority of more than one bank by 2010. By consolidating the holdings in Danareksa, the government will be in compliance with the bank's regulations.

The Indonesian sovereigns due 2018 were better by 0.5 to trade at 103.5 bid, 104 offered. The bonds due 2038 were quoted at 104.5 bid, 105 offered.

In Pakistan, two members of the atomic energy agency were kidnapped in the embattled region near the country's north-western border with Afghanistan.

Recently, pro-Taliban fighters declared a truce with government forces, but it is unclear who is responsible for the abductions, according to a BBC report.

The Pakistani government bonds due 2017 were spotted at 83 bid, 86 offered.

Also, India's industrial production was higher by 7.6% in December, compared to December 2006.

Manufacturing was the fastest growing sector, which helped propel the statistics past the 5.1% estimate, the BBC reported.

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