Emerging market prices drop; Spreads in on Treasuries; Indonesia to offer $1.5 billion

By Aaron Hochman-Zimmerman

New York, June 10 - Emerging markets generally lost in price terms on Tuesday, but spreads came in as Treasuries sold off.

The market is turning back to "fear and concern," a trader said as negative headlines hung over the market along with the feeling that in "April and May there was the bounce and maybe things are as bad as we thought in the beginning of the year."

In trading, Asia was fairly resilient, but other than Venezuela, Latin America ended the day bloodied.

The benchmark Venezuelan bonds due 2027 were better by 1 point.

In the primary, the long-awaited sovereign from Indonesia seemed closer to reality as investors talked of the likely $1.5 billion 10-year issue.

Elsewhere, mixed equities pushed volatility higher by only 0.06 to 23.18, according to the VIX index. The index is a frequently used measure of market volatility.

Treasuries gave way to tighter spreads in merging markets as JPMorgan's EMBI+ index narrowed by 10 basis points to a spread of 264 bps. The EMBI+ determines the amount of extra yield investors will demand to hold assets in emerging markets debt.

LatAm tighter but lower

Latin American trading saw "losses on the dollar side but spreads a little bit tighter," said Enrique Alvarez, a Latin America debt strategist at think tank IDEAglobal.

Brazil was "soft in price terms," he said.

The 11% bonds due 2040 were lower by 0.7 point to 134 bid, 134.1 offered, while the 7 1/8% bonds due 2037 gave up 0.55 point to 115.6 bid, 115.95 offered.

Venezuela was the big winner as some short covering propelled the 9¼% bonds up by 1 point to 96 bid, 96.35 offered, Alvarez said.

Argentina, Ecuador tumble

"Argentina and Ecuador are the two standouts," Alvarez said, as each lost more than 1 point from their benchmark bonds.

In Argentina, president Cristina Kirchner took aim at striking farmers and truckers by accusing them of hoarding "extraordinary profits," which higher taxes would convert into funding for social programs and infrastructure.

Kirchner's tone was also less defensive than in past speeches, a market source said; wondering what would have happened if she had taken a similar tack at the outset of the conflict.

The current situation still "leaves some unknowns," Alvarez said.

The 8.28% Argentine bonds due 2033 sank by 1.5 points to 81.65 bid, 82.7 offered.

In Ecuador, president Rafael Correa said Saturday that he again asked commissions to look at the legitimacy of some of the country's foreign debt.

The credit has suffered since, but is still up about 7% on the year, down from a high of 9%, Alvarez said.

The 8% Ecuadorian sovereigns due 2030 dropped 1.25 points to 98.75 bid, 100.4 offered.

Asian credit better in U.S. trading

Many had anticipated a difficult time in Asia as markets reacted to the rash of negative headlines and "it was a rough overnight session," a trader said.

Although, "we haven't followed through from there," he said, "we're a bit tighter from the Asia closes."

"Equities are taking the brunt of it," he said.

The major weakness is coming from the front end of the cash curves, he said.

In Indonesia, the central bank said it expects a deficit of more than 8 trillion rupiah in 2008, despite a first-quarter surplus of 2.2 billion rupiah, the Jakarta Post reported.

In 2007, the deficit only hit 1.4 trillion rupiah.

"Despite the first-quarter surplus, tough economic times ahead imply a higher use of policy operations," bank governor Boediono told the Jakarta Post, implying rate hikes beyond the 50 bps already enacted this year.

Inflation in May was up 10.3% from May 2007, after a cut in fuel subsidies, and analysts expect June inflation to surpass 11%, the report said.

The rupiah was seen trading at 9,323.87 to the dollar.

The Indonesian sovereign bonds due 2017 fell 0.75 point to 99 bid, 99.75 offered.

The Philippines' government bonds were lower by 0.375 point to 129.625 bid, 130.125 offered.

In Pakistan, lawyers marched in order to restore the reinstatement of top judges who were fired by president Pervez Musharraf during the period of emergency rule last November.

The ruling parties disagree over how to reinstate the judges.

Nawaz Sharif's Pakistan Muslim League (PML-N) wants restoration in the form of an executive order from prime minister Syed Yousuf Raza Gilani, the Pakistan People's Party (PPP) wants to tie the restoration to a bill of constitutional reforms.

The Pakistani sovereigns due 2017 were quoted at 74 bid, 78 offered.

In China, a market source noted that as oil prices continue to influence the market, Chinese consumption of automobile-grade gasoline is still relatively small.

Over the long term the expectation for large growth has not changed, but in the near term, changes in consumption are unlikely, the source said.

Indonesia bringing $1.5 billion

The Republic of Indonesia (Ba3/BB-/BB) plans to offer a $1.5 billion 10-year bond through Credit Suisse, Deutsche Bank and Lehman Brothers.

The long-rumored issue has met concerns of oversupply, but "the market is backed up," a trader said.

The question is now over how the market conditions will treat the issue when it is finally presented to investors, a trader said.

Some are still expecting news about a new sovereign from the Philippines, but the market will not likely see anything from Vietnam "until the inflation situation stabilizes," the trader said.

Also in Asia, the Philippine National Bank will offer at least PHP 3 billion 10-year lower tier II notes through Deutsche Bank.

The notes have been talked at 8½%.

The coupon will step up if the bonds are not called in five years.

The issue is intended to refinance lower tier II notes, which are callable in February 2009.

Philippine National Bank is a Pasay City, Philippines-based commercial and retail bank.

Elsewhere, JSC Bank of Georgia (B3/B+/B+) priced $110 million two-year loan passthrough notes. JPMorgan acted as the bookrunner for the deal.

"I am very pleased to have completed this important transaction, which is the largest debt private placement from Caucasus to date," said Nicholas Enukidze, chairman of the supervisory board, in a statement.

"This transaction marks a significant step toward fulfillment of Bank of Georgia's funding plans for 2008 and confirms strong interest of debt investors in Bank of Georgia," he said.

'More of the same' in emerging Europe

With nothing new to spook investors, just "more of the same," the market still felt "generally weaker and wider," a trader said.

"It's been busier than yesterday," but "the [high-yield crossover index] is 20 [bps] and we've been in that mood all day," he said.

In Russia, despite rate hikes and high inflation the banks have seen impressive growth numbers, according to a market source.

May inflation hit 15.1% year over year, even as the government clung to its 10.5% prediction for 2008.

Still, corporate lending was up 68% year over year in April and bank assets were up 48% year over year, the source said.

In particular, VTB Bank shows potential to grow another 27% past its current share price, another market source said.

The ruble was seen trading at 23.71 to the dollar.

The Russian government bonds due 2030 dropped 0.45 point to 113.3 bid, 113.4 offered.

Meanwhile in Belarus, the government is expecting a $2 billion loan from Russia in 2008, said first deputy finance minister Andrei Kharkovets, according to the Itar-Tass News Agency.

"We have held negotiations since the beginning of the year. The talks are now focused on evaluating our ability to draw and repay the Russian loan," he told reporters.

In Turkey, industrial production increased by 6.3% in April, according to the Turkish Daily News.

The monthly industrial production index hit 149.4.

Manufacturing saw the biggest increase of 6.7%, followed by utilities at 5.2%. Mining suffered a 1.1% loss.

The report noted that the constitutional court case against the ruling AK Party has shaken consumer confidence.

The Turkish sovereigns due 2030 were banged up for another 1.05 points to 147.75 bid, 148.25 offered.

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