Emerging markets trade mixed to weaker; Ecuador bonds shredded; Yuan deal enters primary market

By Aaron Hochman-Zimmerman

New York, July 10 - Emerging markets debt trading was mixed to lower in price terms but held steady on a spread basis as Treasuries slipped.

In trading, Ecuador far outpaced the losers as investors had little patience to guess at the political leaning of the new finance minister on top of being spooked by the prospect of further nationalizations.

Ecuador's bonds due 2030 gave back 3.25 points.

On the plus side, Mexico's investment-grade bonds benefited from the day's flight to safety as Treasuries advanced, said Enrique Alvarez, a Latin America debt strategist at think tank IDEAglobal.

The benchmark bonds due 2017 tacked on 0.45 point as Latin America stepped backward.

The primary market saw a small glimmer from a local deal from China's China Communications Construction Co. Ltd., which proposed a possible 15 billion yuan deal over five to 15 years.

While the primary has been coasting in low gear, the week ended Wednesday saw $343 million in outflows from emerging market bond funds, according to EPFR Global. The figure represents the fifth consecutive week of losses from the sector.

Meanwhile in the broader market, volatility dipped but then spiked near the close to finish higher by 0.36 at 25.59, according to the VIX index. The index is a common gauge of market volatility.

With rising Treasury yields, emerging markets remained unchanged in spread terms at 309 basis points, according to JPMorgan's EMBI+ index. The EMBI+ calculates the amount of extra yield investors will demand to hold assets in emerging markets debt.

LatAm softens

With political turmoil from every corner of Latin America, "bids are a little lower," IDEAglobal's Alvarez said.

In Argentina, farmers announced a new round of protests that will be held until the upper house of the legislature votes on the controversial tax bill on Wednesday, according to the Buenos Aires Herald.

The bill recently passed the lower house.

The protests are aimed at influencing the Senate to change the bill that would approve the government's tax increases.

"Today we don't see a sufficient number of senators to modify this," said farm leader Eduardo Buzzi about the bill.

"We've seen a slight pullback" in Argentine credit, Alvarez said, which is now trading "at the bottom of the range" near its lows.

The 8.28% Argentine discount bonds due 2033 lost 0.75 point to 73.75 bid, 74.25 offered.

Elsewhere, Brazil traded "soft overall," Alvarez said, as it is approaching "a breaking point" due to its accelerating inflation.

If Brazil falters, "the whole market gets pulled down," he said.

The real was seen trading at 1.605 to the dollar.

The 7 1/8% Brazilian bonds due 2037 slid 0.3 point to 109.5 bid, 110 offered.

In Peru, demonstrators accused president Alan Garcia of unfairly favoring the business sector with free market trade policies.

"These are sort of continuous in nature," Alvarez said about the strikes, although recently the government, which is under pressure from the unrest, offered "somewhat more" money to social causes.

Still, the strikes are only affecting bond prices at "a very meager level," he said.

The Peruvian 8 3/8% sovereigns due 2016 slipped 0.25 point to 116.6 bid, to 117.1 offered.

Also in Latin America, Mexico was the day's outperformer with inflation rates that were "bad, but not completely out of sync with expectations," he said.

The 5 5/8% Mexican bonds due 2017 took on 0.45 point to 101.35 bid.

Ecuador sells again

In Ecuador, while the market continues to hear differing assessments of new finance minister Wilma Salgado, the latest take is that she sees "no immediate need" for new debt issues, a market source said.

Instead, Salgado will focus on investments in social programs to further economic growth, she said, according to the source.

The source recommends against a long position in Ecuador as further reviews of debt by the government are likely.

Also, according to Alvarez, the confiscations of media outlets across the country, which were initially intended to target only the unpaid debts of the Isaias family, may be expanded by president Rafael Correa to punish crimes described as "different infractions."

Investors may be worried that Correa's government shows "no respect for private property rights" and that he is "basically trying to bind the overall media with constraints," Alvarez said.

The 8% Ecuadorian bonds due 2030 sank another 3.25 points to 90.5 bid, 92.5 offered.

Emerging Europe inches higher

Emerging Europe showed resiliency to political risk and traded slightly better even as Georgia's ambassador to Moscow was recalled after Russia acknowledged its violations of Georgian airspace by its fighter aircraft earlier in the week.

On Thursday, U.S. secretary of state Conoleezza Rice met with opposition and ruling party leaders including president Mikhail Saakashvili in order to find a solution to the growing hostilities in the Abkhazia and South Ossetia regions.

In her statements to reporters, Rice encouraged Russia to do more to stop the escalation of violence rather than encourage it.

Still, during her visit, the Russian air force flew low-level show of force missions over South Ossetia.

"To clarify the situation, Russian military planes have made a short flight over South Ossetia," Russia's foreign ministry said.

"As later events showed, even this step allowed cooling down the hot heads in Tbilisi and avert a scenario with the use of force that was quite real," the foreign ministry said, according to the Itar-Tass News Agency.

The Russian government bonds due 2030 added just 0.125 point to 112.875 bid, 113.25 offered.

Also in corporates, Alexey Miller chairman of the gas monopoly OAO Gazprom, met with Libya's president Muammar Qadhafi to arrange for greater cooperation between the two, according to a Gazprom press release.

The sides were able to reach a preliminary agreement to construct a gas pipeline from Libya to Europe, the release said.

Elsewhere in Turkey, prime minister Recep Tayyip Erdogan was in Iraq to discuss the countries' policy toward the rebel group the Kurdistan Workers' Party (PKK) as well as Iraqi economic development.

The Turkish military has conducted aerial raids and ground assaults on PKK positions in northern Iraq beginning in October 2007.

Iran president Mahmoud Ahmadinejad is the only other of Iraq's neighbors to send their head of state to visit Baghdad.

Meanwhile, arrests were made in conjunction with the investigation into Wednesday's killing of three policemen and three gunmen outside the U.S. consulate, reports said.

The gun battle between police and the shooters was labeled an "act of terror."

The Turkish sovereigns due 2030 added 0.25 point to 143 bid, 143.5 offered.

Asia ends mixed

Asia traded mixed on a day of light volumes and sliding Treasuries.

In the Philippines, gasoline retailers including Petron Corp. and Pilipinas Shell Petroleum Corp. announced a price cut of PHP 1, according to the Manila Times.

The movement away from frequent increases was started by the smaller Flying V stations while the larger companies Petron and Pilipinas Shell were obliged to follow, the report said.

The Philippine government bonds due 2030 were lower by 0.5 point to 121 bid, 121.5 offered.

Meanwhile, beginning in October, Petron and Pilipinas Shell will be required to mix at least 2.5% of biofuel into the products it sells to companies in Indonesia, the Jakarta Post reported.

"The main purpose of the regulation is not to provide a cheaper fuel source, but to diversify sources of energy and to support the biofuel industry," said Evita Legowo of the national team for biofuel development.

From within the government, concerns were raised in the legislature that with increased demand, commodity prices would increase as well.

Al Hilal, head of the national team for biofuel development, defended the government's decision.

Domestic consumption of food has only reached 3.8 million tons compared to a total production of 17.5 million tons, he said in the report.

Indonesia's sovereign bonds due 2017 added 0.75 to 96 bid, 97 offered.

Yuan deal joins pipeline

Also in Asia, China Communications Construction Co. Ltd. announced plans to offer up to 15 billion yuan in bonds with a maturity between five and 15 years.

The interest rate for the domestic market issue will not exceed the benchmark lending rate of the central bank.

Proceeds from the sale will be used to refinance debt.

China Communications is a Beijing-based infrastructure and ports operator.

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