Emerging markets mostly flat; High betas slip; Whispers of sovereigns from the Philippines, Uganda

By Aaron Hochman-Zimmerman

New York, May 12 - Prices and spreads were flat in emerging markets on uninspired action with many closed markets in Europe and Asia.

"Relatively speaking they're pretty stable," said Enrique Alvarez, a Latin America debt strategist at think tank IDEAglobal, about bond prices.

Spreads in Latin America inched out just slightly "due to an uptick in U.S. Treasuries," he said.

Also there was "the normal downdrift in Argentina," he said. The benchmark discount bonds due 2033 fell 0.75 point.

Still, in Asia and Europe spreads found their way tighter by just a few points with many of their markets closed.

In the primary, Diagnosticos da America SA announced a $200 million 10-year deal, but sources with their ears to the rails began to hear rumblings of what may be new sovereign issues from the Philippines and Uganda.

With a strong day in equities, volatility sank 1.62 to end at 17.79, according to the VIX index. The index is a standard gauge of market volatility.

On slight Treasury action, emerging markets was wider by 1 basis point to a spread of 268 bps, according to JPMorgan's EMBI+ index. The EMBI+ estimates the amount of extra yield investors will demand to hold assets in emerging markets debt.

LatAm flat on headline parade

Latin America traded lightly and largely flat on a day of heavy headlines across the sector.

In Venezuela, president Hugo Chavez reached out to the Kremlin as he arranged to buy $2 billion of military equipment on his trip to Russia at end of the month, a market source said.

Chavez also announced an economic deal with China to build a Chinese refinery, which will produce 400,000 barrels of Venezuelan oil per day.

The 9¼% Venezuelan bonds due 2027 were up 0.375 point to 88.375 bid, 89.625 offered.

A market source suggested that now may be the time to buy a volatile credit like Venezuela.

"I don't think it's a bad idea to buy Venezuela," IDEAglobal's Alvarez said, "They've got to bounce back sometime."

Meanwhile, Ecuador's bonds "have been creeping higher," Alvarez said.

Each day's gains have not typically been worthy of a parade, but it has slowly improved, he said.

The 8% Ecuadorian sovereigns due 2030 were unchanged at 101 bid, 101.35 offered.

In Brazil, newspapers have speculated that the central bank may hike interest rates to as high as 5% of the country's GDP to fight rising inflation, a market source said.

Still, an unnamed government official said that whoever suggested 5% is "delirious," the market source said.

"I'm really not too certain of what they're going to do," Alvarez said.

The real was seen trading at 1.663 to the dollar.

The 7 1/8% Brazilian sovereign bonds due 2037 were lower by 0.35 point at 114.1 bid, 114.35 offered.

Also in Colombia, the minutes of the central bank's monetary policy meeting left investors feeling hawkish about rates, which the board left unchanged at 9¾% in April, a market source said.

The bank's decision was hardly unanimous, with one camp concerned about inflation and commodity prices and the other concerned about growth and CPI figures, the source said.

The members also debated about the health of the Venezuelan economy, which is the second largest importer of Colombian goods.

The peso was seen trading at 1,779.09 to the dollar.

Data released as strike goes on

In Argentina, many expect the strike over higher export taxes to continue on past May 15, a market source said as Saturday's round of talks failed.

Still, elsewhere in the troubled economy, the reporting agency Indec announced 0.8% inflation during April.

The figure the government was willing to report was lower than the 1% most had expected.

"The difference is huge," Alvarez said about the discrepancy between the reported and the actual inflation of the Argentine peso.

Many feel it is closer to 20% and "I think we're on the upside of that," he said.

Also in Argentina, the governor of the Salta province, Juan Manuel Urtubey, is planning a trip to New York to meet with investors in order to buy back all of the $159 million 11.55% bonds due Dec. 28, 2015 that are outstanding.

The initial offer made in 2001 was for $234 million, a market source said.

The peso was seen trading at 3.16 to the dollar.

The 8.28% Argentine discount bonds due 2033 slipped by 0.75 point to 79.25 bid, 80 offered.

New sovs rumored from Asia, Africa

In the primary market, hints at increased foreign borrowing gave investors cause to expect a new issue from the Philippines.

In the European time zone, Uganda is reportedly discussing the possibility of coming to market considering that the bonds from Gabon are trading only 50 bps wide of emerging European bonds from countries such as Ukraine and Turkey, a market source said.

Elsewhere in Latin America, Brazil's Diagnosticos da America (DASA) (BB-/) will market its $200 million 10-year senior unsecured bonds until May 20.

Credit Suisse and Merrill Lynch will act as bookrunners for the deal.

The bonds are non-callable for five years.

The roadshow will be held on Wednesday in Singapore, on Thursday in Hong Kong and London, on Friday in Switzerland, with conference calls to Europe on May 19 in Los Angeles, Philadelphia and New Jersey and on May 20 in New York and Boston.

DASA is a Sao Paulo-based pharmaceutical firm.

Quiet Asia slightly firmer

"Everything was quiet with a lot of Europe and Asia out," a trader said.

"Despite the quiet, the tone had a relative firmness mostly in CDS," although "I could see it going either way overnight," he said about the market sentiment.

In the Philippines, finance secretary Margarito Teves said that internal interest has risen far enough for the government to make plans to boost its external borrowing, according to a market source.

The likely first sources will be the World Bank and Asian Development Bank, but the source noted that the language used seems to indicate another dollar-denominated issue may be forthcoming.

The central bank also reportedly raised its inflation outlook to 5.5% to 6.5% from 4% to 5% for 2008, the source said.

Similarly the benchmark lending rate may soon jump to 4.5% to 6.5% from 3.5% to 5.5%, the source said, in order to keep inflation under control.

The peso was seen trading at 42.56 to the dollar.

The Philippine bonds due 2030 were unchanged at 130.5 bid, 131 offered.

In Indonesia, the department of energy and mineral resources asked the government to approve a 21% increase in fuel prices, a market source said.

The original request from the department was a hike of 28.7%.

If the price of oil maintains its current level or moves higher, further price hikes are likely before the 2009 elections.

The price of light sweet crude was seen below $124 per barrel.

The Indonesian sovereign bonds due 2017 added 0.25 point to 101.25 bid, 102 offered.

In Pakistan, the former prime minister and leader of the Pakistan Muslim League (PML-N), Nawaz Sharif, plans to split the governing coalition over a disagreement about the replacement of the fired judges.

Sharif announced the plans to leave the coalition and withdraw his party's cabinet ministers after he could not agree to the reforms that the Pakistani People's Party (PPP) made conditional to the restoration of the judges.

Sharif said his party will support the PPP on a case-by-case basis.

Also in China, April's CPI figure of 8.5% came higher than the 8.2% expected based on high commodity prices, a market source said.

Still, the figure was lower than the February high of 8.7%, the source said.

Emerging Europe tighter

Spreads narrowed an average of just under 5 bps over light trading in emerging Europe on Monday.

Tone shifted as Treasuries lost hold of last week's rally to favor credit.

In Russia, prime minister Vladimir Putin submitted his selection of cabinet officials to president Dmitry Medvedev.

Both finance minister Alexei Kudrin and foreign minister Sergei Lavrov are expected to keep their jobs.

Conservative chairman of Russia's oil firm OAO Rosneft, Igor Sechin, will become the deputy head of Kremlin administration.

The Russian government bonds due 2030 added 0.25 point to 115.625 bid.

Meanwhile in Georgia, the Russian news service Itar-Tass claimed the fifth and sixth Georgian air force reconnaissance drones were shot down over what it calls "the self-proclaimed republic of Abkhazia" on Monday.

Still, the Russian ambassador to Georgia, Vyacheslav Kovalenko, told reporters he believes the two countries can work through their differences if their long-standing friendship is preserved, Itar-Tass reported.

Kovalenko made the comments Friday during a celebration of the end of World War II.

Prime minister Putin also sent his Victory Day greetings to Georgia and the other countries of the Commonwealth of Independent States.

Issues in other CIS countries, Kazakhstan and Ukraine, quietly traded 2 bps to 3 bps tighter, a market source said.

Market waits on rate decision

Speculation over Turkey's monetary policy was the center of attention in emerging Europe on Monday.

Many investors expect a 50 bps hike from the inflation plagued country, but others are counting on a hike of only 25 bps from the current 15.25%.

By the end of the year the policy interest rate could be as high as 16.5%, according to a market source.

A longer-term project estimates the first easing of 50 bps in 2009.

"Short-run macroeconomic policies will need to balance carefully the desire to support growth with the need to contain inflation and the current account deficit," the International Monetary Fund said, according to a market source.

The lira was seen trading at 1.254 to the dollar.

The Turkish sovereigns due 2030 were better by 0.25 point to 153.2 bid.

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