Emerging markets tighter, prices softer; Rate hike talk in Turkey, Philippines; Ukraine mandates banks

By Aaron Hochman-Zimmerman

New York, May 28 - Emerging markets saw narrowing spreads on Treasury action, but prices slipped lower as inflation remained on the minds of investors and governments.

In the primary, Ukraine jumped out with its mandate of BNP Paribas, JPMorgan and Standard Bank for its upcoming sovereign.

Meanwhile in trading, Argentina's discount bonds due 2033 managed to add 0.15 point despite ongoing strikes and political inaction from the government.

Still, although spreads generally came in, prices were held back largely over the question of inflation.

Central banks in Turkey and the Philippines discussed rate hikes in the near term, while Vietnam's market was closed due to "technical glitches" as it battled its own inflation problem.

However, "the biggest protagonist for the day was the Treasury market in the U.S.," said Enrique Alvarez, a Latin America debt strategist at think tank IDEAglobal.

"We haven't seen 4% in a long time," he said of Treasury yields, which touched over 4% for the first time since January.

Also helping to drive the credit market, "durable goods may have helped equities in the morning," he said.

Overall equities were mixed as volatility dipped lower by 0.57 to end at 19.07, according to the VIX index. The index is a frequently used gauge of market volatility.

As Treasuries sank emerging markets found room to tighten by 6 basis points to a spread of 249 bps, according to JPMorgan's EMBI+ index. The EMBI+ determines the amount of extra yield investors are willing to accept to keep assets in emerging markets debt.

LatAm down, tighter

"Everything is down on the day, although were tightening in spread terms," said IDEAglobal's Alvarez.

After a strong Tuesday, Venezuela continued to benefit from oil prices, which saw the high side of $130 per barrel again on Wednesday.

"It's more the oil rise," Alvarez said about Venezuela's performance.

"It's a contrarian indicator to the very lean growth figures we've seen," he said.

The 9¼% Venezuelan sovereign bonds due 2027 were better by 0.8 point to 94.3 bid, 94.6 offered.

In Brazil, it remained unclear whether or not the country would pursue using its budget surplus to build a sovereign wealth fund or to fund a health care initiative.

"There's still a very mixed picture there," Alvarez said.

Still, "they weren't going to be a very large player," he said about the wealth fund.

The 7 1/8% Brazilian sovereigns were lower by 0.375 point to 112.55 bid, 112.7 offered.

'Stalemate' in Argentina

Argentina's farmers and government have not been in talks since the government's own rally was upstaged by the farmers over the weekend, "the government is somewhat peeved at that and have decided to break-off talks," Alvarez said.

The farmers "are rehashing the same tactics," he said, although "it's not a full-fledged strike."

"They are interrupting the flow of trucks into the ports which are carrying grains for export," he said rather than blocking highway traffic entirely.

The farmers are having similar effects on beef and soy beans, which have traded higher on shorter supplies.

"It's very much a stalemate, and the loser is the Argentine economy," he said.

The 8.28% discount bonds due 2033 managed to add 0.15 point to 80.5 bid, 81 offered.

"With all the liquidation we're going to see the short-sellers run out of ammunition," Alvarez said.

"There's just not much more to go," he said about the tumbling bond prices, "I'm thinking there's going to be a bounce pretty soon."

Emerging Europe quiet but tighter

Spreads came in nearly 20 bps during emerging Europe's morning and were helped further by the initial impression of the durable goods figures in the United States, a trader said.

Still, prices were hesitant to move.

"It's actually been a quiet and dull day," he said, although "it's stronger; it just doesn't feel very very convincing. It could turn around at any point."

In Turkey, the minutes of the monetary policy committee meeting were released revealing the possibility of a rate hike in order to deal with a concern over inflation driven by surging food and energy prices.

"Consumer prices were up 1.68% in April, and annual inflation rose to 9.66%. The rise in inflation was largely driven by increases in food and oil prices and lagged effects of exchange rate movements. The surge in food and energy prices accounted for about 6.3% of the annual inflation rate by April," the minutes recounted in item one.

The report concludes: "... the central bank will continue to take the necessary measures to prevent the potential second-round effects of the adverse developments in food and energy prices. Accordingly, the committee will consider the possibility of a further measured rate hike in the next meeting."

The Turkish government bonds due 2030 were spotted at 151.75 bid, 152 offered.

In Russia, finance minister Alexei Kudrin said additional income will allow the government to spend another 120.4 billion rubles in 2008, according to the RIA Novosti News Agency.

In 2009, Kudrin expects revenues to total 9.5 trillion rubles with expenses at 8.7 trillion rubles, leaving a surplus of 771.6 billion rubles.

Also, the country's GDP grew by 8.4% year on year in April and 8.3% from January to April of 2008, the report said.

The Russian sovereign bonds due 2030 added 0.25 point to 114.625 bid.

Also in the Commonwealth of Independent States, Georgia's government asked Russia for an apology and compensation for the downing of a Georgian air force drone on April 20.

In a letter to Moscow, the Georgian foreign ministry "persistently demands that Russia should immediately withdraw its additional military contingent, military hardware and armaments, deployed in the zone of the Abkhazian conflict without coordination with the Georgian side, from the territory of Georgia," according to a note published by the Itar-Tass News Agency.

Ukraine sets mandate

In the primary, Ukraine announced that BNP Paribas, JPMorgan and Standard Bank will act as bookrunners for its upcoming sovereigns.

The new bonds are likely to be a new 10-year issue or a retap of its 6¾% bonds due 2017, a market source said.

The Ukrainian bonds due 2017 were quoted at 97 bid, 97.5 offered.

Also, Argentina's Industrias Metalurgicas Pescarmona SA (Impsa) tightened talk to between 10% and 10¼% for its upsized $65 million one-year offer.

The deal was originally announced at $40 million and talked at 11%.

BCP Securities will act as the bookrunner for the transaction.

Impsa is a Mendoza, Argentina-based producer of wind and hydropower equipment.

In local currencies, China Southern Airline Co. Ltd. was approved by its board of directors to issue a 1.5 billion yuan three-year bond.

Proceeds will be used for working capital.

China Southern is a Guangzhou, China-based airline.

Asia 'better balanced,' Vietnam closed

In Asia, market watchers saw "spreads tighter with the Treasury move," a trader said.

"We tightened this morning and it seemed to bring buyers back."

The better feeling may be fragile, but "the market feels a little bit better balanced ... There's better two-way flow," he said.

Vietnam continued to suffer from galloping inflation and "technical glitches," which kept its market closed for a second day, the trader said.

"There's been some disfunction," he said.

The dong was seen trading at 16,215 to the dollar, while the Vietnamese government bonds due 2016 were seen quoted at 96 bid, 98 offered.

"They've taken Indonesia down with them as well," he said.

Indonesia announced it will leave OPEC at the end of the year, now that it is a net importer of oil.

Indonesia's economy has struggled with energy prices as a recent cut in government subsidies sent oil prices soaring.

The Indonesian sovereigns due 2017 lost 0.625 point to 100.75 bid, 101.25 offered.

Pakistan's bonds were slammed by a similar mixture of "high inflation and politics," the trader said.

Pakistan's ruling coalition is rallying support to amend the constitution to wrest power from president Pervez Musharraf in favor of parliament.

The rupee was seen trading at 67.8 to the dollar.

The government bonds due 2017 were spotted at 78 bid, 83 offered.

Philippines considers rate hike

In the Philippines, the central bank said interest rates may be raised if inflation rates approach limits for 2009, the Manila Times reported.

In April, inflation hit a three-year high at 8.3%, the report said, with a 3% to 5% target for the year.

At a meeting next week, the policymakers will consider hikes to the current 5% borrowing and 7% lending rates.

The Philippine government bonds due 2030 held unchanged at 130.25 bid, 130.75 offered.

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