Emerging markets tighten; Venezuela, Ecuador hurt by falling oil; Hungary talks new sovereign

By Aaron Hochman-Zimmerman

New York, June 4 - Emerging markets crept tighter as Treasuries were pushed back although volumes were kept light as traders looked ahead to Friday's nonfarm payroll data.

Argentina managed to climb in trading, but as most were delighted to see oil prices falling, Venezuela and Ecuador were not.

Panama said it will issue $477.74 million of 9 3/8% bonds due 2029 in exchange for paper due 2011 and 2012.

Also, Hungary followed its neighbor the Czech Republic with a new issue of its own.

The new Hungarian euro-denominated 10-year bond was talked at mid-swaps plus 100 bps to 105 bps.

Mostly, "it's been somewhat quiet," said Enrique Alvarez, a Latin America debt strategist at think tank IDEAglobal.

"We're just watching data, watching stocks and what Lehman's doing," a trader said.

On a mixed day for equities, volatility spiked in the afternoon to leave the VIX index higher by 0.56 at 20.80. The index is a common measure of market volatility.

Emerging markets tightened by 9 bps on receding Treasuries to a spread of 244 bps, according to JPMorgan's EMBI+ index. The EMBI+ calculates the amount of extra yield investors are willing to accept to hold assets in emerging market debt instead of Treasuries.

Emerging Europe up on slow trading

With "summer-like" volumes, emerging Europe traded higher on Wednesday, but "I'm struggling to find a reason to buy," a trader said.

"I have seen buyers," he said, adding that the market may be in "one of those classic situations when it's tempting to be too bearish."

"If you put that trade on, this time next week everything you sold may be nicely higher," he said.

In Turkey, the government proposed adjusting inflation targets to 7.5% and 6.5% for 2009 and 2010, state minister Mehmet Simsek wrote to the central bank in an open letter.

"Food and energy prices continue to pose risks to the medium-term inflation outlook and there is no clear evidence that this trend will reverse in the short term," the letter said.

"Further supply side shocks," he said, force the country to gradually ease its way to 4% inflation.

Central bank governor Durmus Yilmaz expects a 9.3% rate of inflation for 2008, providing "interest rates are increased in a gradual and measured fashion until the middle of the year and held unchanged for the rest of 2008," the Turkish Daily News reported.

The lira was seen trading at 1.238 to the dollar.

The Turkish government bonds due 2030 added 0.125 point to 151.25 bid.

Meanwhile in Russia, the European Union will press Moscow for a new partnership treaty that includes detailed and specific guidelines or any agreement will be worthless, said Benita Ferrero-Waldner, the E.U.'s external relations commissioner, according to the RIA Novosti News Agency.

Russia has been hesitant to enter into binding agreements with the E.U. as an energy supplier, the report said.

The Russian sovereigns due 2030 were better by 0.5 point to 114.2 bid.

Russia wants Abkhazia airspace clear

Russia demanded that Georgia's air force cease its "provocative" flights over Abkhazia in order to comply with standing security agreements, the Itar-Tass News Agency reported.

"The Russian side expects that Georgia will stop such provocative flights in the security zone and the restricted-weapons zone, as well as stresses a need to strictly comply with its commitments on the Moscow agreements and follow appeals of the U.N. Security Council," the Russian foreign ministry said.

"These flights are a rude violation of the Moscow agreement on ceasefire and disengagement of May 14, 1994 and are at variance with an insistent appeal of the U.N. Security Council to refrain from any acts of violence and provocations, including political actions or rhetoric ..." the foreign ministry said.

The conflict has excited only passing interest in the market, a trader said.

"People talk about but it never really crystallizes into anything," he said.

"Water off a duck's back, I guess."

Hungary talks, Panama swaps sovereigns

In the primary market, the Republic of Hungary (A2/BBB+/BBB) talked its upcoming euro-denominated 10-year bond at mid-swaps plus 100 bps to 105 bps.

Pricing is expected this week.

BNP Paribas, Citigroup and ING will act as bookrunners for the deal.

Proceeds will be used for general financing purposes.

Also on the sovereign side, the Republic of Panama (Ba1/BB+/BB+) issued $477.74 million of new 9 3/8% bonds due 2029 in exchange for buying back $549.16 million of the 9 5/8% bonds due 2011 and the 9 3/8% bonds due 2012.

The new bonds priced at 135.205.

Citigroup and Deutsche Bank were exchange agents.

The debt swap came alongside a $235 million reopening of the 7¼% bonds due 2015 on Monday.

Proceeds will be used for general budgetary purposes.

The price came at a premium to the bond's trading value at 133.5 bid, 134.5 offered, so "it looks to have gone pretty well," IDEAglobal's Alvarez said.

Still "they were looking for $500 million," he said.

Corporates join pipeline

Meanwhile in corporates, China Merchants International Holdings Co. Ltd. (Baa2/BBB) issued talk for its dollar-denominated five- and 10-year senior tranches.

The five-year tranche was talked in the mid-swaps plus 200 bps area.

The 10-year tranche was talked between mid-swaps plus 237.5 bps to 250 bps.

Pricing is expected this week.

ING and Merrill Lynch will act as bookrunners for the deal.

China Merchants is a Hong Kong-based holding firm with interests in import and export.

Brazil's Arantes International Ltd. (B2//B) talked a $150 million five-year senior unsecured bond at 10½%, according to a market source.

The roadshow, ending on June 12, will make stops in Singapore, Hong Kong, London, Switzerland, New York, Boston and the West Coast of the United States.

Credit Suisse and Banco Santander will act as bookrunners for the deal.

The bonds will be paid as a bullet.

Proceeds will be used to refinance short- and long-term debt.

Arantes is a Rio de Janiero-based beef producer.

Also, Russia's OJSC Mobile TeleSystems (Ba2/BB-/BB+) plans to issue 10 billion ruble 10-year notes at par to yield between 8.35% and 8.85%.

Troika, Gazprombank and Raiffeisenbank will act as bookrunners for the deal.

The auction is expected in the second half of June.

Mobile TeleSystems is a Moscow-based mobile phone service provider.

Elsewhere in the primary market, rumors held that Brazil's Companhia Siderurgica Nacional is planning a $500 million 10-year bond via Credit Suisse, a market source said.

LatAm tightens on Treasuries

"Jitters very lightly sprinkled the LatAm side off the U.S.," said IDEAglobal's Alvarez.

Trading saw "a lot of tightening" as "the 10-year [U.S. Treasury bond] has taken off all the way to 4% again," he said.

"Treasuries are dragging the category," he said.

Credits narrowed 11 bps for the category as a whole, but there was some softness in Ecuador and Venezuela as oil traded near $122 per barrel, he said.

The 8% Ecuadorian bonds due 2030 dropped 0.375 point to 100.5 bid, 102 offered.

The 9¼% Venezuelan bonds due 2027 lost 0.4 point to 93.1 bid, 93.5 offered.

Brazil's five-year CDS narrowed by 10 bps, while its 7 1/8% sovereigns due 2037 slipped 1 point to 117 bid, 117.3 offered.

The highly traded 11% bonds due 2040 were quoted at 136.25 bid. 136.35 offered.

Speculators to blame, says Kirchner

Argentina was "a shade firmer," Alvarez said, as president Cristina Kirchner accused soy bean speculators of causing the country's grain crisis while at a world food forum in Rome, the Buenos Aires Herald reported.

"In my country, the Republic of Argentina, a small investor with just $16,000 can make a profit of 30% in just six months in a sowing pool, quite a remarkable profit in the world as it is today," she said at the conference.

The Argentine five-year CDS narrowed nearly 20 bps as the 8.28% discount bonds due 2033 were up by 0.3 point to 81.8 bid, 82.5 offered.

Asia held flat

The continued difficulties in the local markets left Asian credit mostly flat even as other sectors saw tightening thanks to a retreat of U.S. Treasuries.

In the Philippines, a Manila Times poll showed that prices for goods and services increased at the highest rate in three years during May.

The poll showed a possible inflation rate of 9.1% in May, which is within the central bank target of 8.8% to 9.6% but is up from 8.3% in April and 6.4% in March.

George Worthington, chief economist for Asia-Pacific IFR Markets, recommended at least a 50 bps rate hike, according to the report, however "I fear that it will do nothing and risk inflationary expectations taking off and driving a wage-price spiral," Worthington said.

The peso was seen trading at 44.04 to the dollar.

Children given up over food prices

In Indonesia, the government and Unicef's joint charity, Save the Children, found that more than 450,000 children have been "given up" by their parents due to rising food prices, the BBC reported.

Of 500,000 children in shelters only 6% are orphans, the report said.

"The increasing food prices, the increasing cost of living in Indonesia is really hitting the poorest families. And when you realize that the great majority of assistance is only available through institutions, that's where the problem is," said Florence Martin of Save the Children.

Such a large number of homeless children created a staffing shortage at the facilities, Martin said, which led to children as young as nine and 10 years old to run many of the shelters.

The rupiah was seen trading at 9,415.40 to the dollar.

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