Emerging markets wrap tighter; Turkey bounces; SM Investments prices $350 million five-year bonds

By Aaron Hochman-Zimmerman

New York, July 11 - Emerging markets tightened as equities and Treasuries twisted in the wind on Friday.

"There are all these bottom fishers," a market source said about the secondary market, although "The high-beta credits have been the worst," he said.

Argentina was lagging again as politicians and farmers continued to grapple over the export tax issue, but investors returned to Turkey, which sold off earlier in the week due to an attack outside the U.S. consulate that left six dead.

The primary was roused by Philippines' SM Investments Corp., which priced $350 million five-year bonds through UBS.

Other deals still on the calendar "are waiting to see what happens next week," the source said.

"Historically, in the past 12 months, these market retracements have lasted four weeks," he said as a four-week cycle was scheduled to end on Friday.

"We could see a big rebound next week if earnings from the likes of Wells Fargo and Citigroup don't prove worse than expected," he said on Friday.

Friday's session was also a day of wild speculation about the futures of Fannie Mae and Freddie Mac.

The waffling equities saw volatility peak in the afternoon and trail off, but still end higher by 1.90 at 27.49, according to the VIX index. The index is a common measure of market volatility.

Treasury yields soared as emerging markets reeled in tighter by 12 basis points to a spread of 299 bps, according to JPMorgan's EMBI+ index. The EMBI+ estimates the amount of extra yield investors will require to hold assets in emerging markets debt.

The EMBI global diversified index, which represents sovereigns and quasi-sovereigns, was tighter by 11 bps with a spread of 325 bps.

The diversified index has a less strict liquidity rule for inclusion.

Recoveries in Emerging Europe

Emerging Europe traded tighter on Treasuries but saw credits from both Ukraine and Turkey outperform emerging markets.

Turkey "was sold off way too much," an emerging markets strategist said.

Meanwhile, the attack in front of the U.S. consulate and the recent kidnapping of three German climbers has resulted in travel warnings from the British and German governments.

Still, some believe the warnings will not weigh on tourism revenues, according to the Turkish Daily News.

"Such events can be seen in almost every part of the world," said Cengiz Yucel, the research and development director for the Association of Turkish Travel Agencies, in the report.

"A tourism crisis would arise if big tour operators cancel their reservations. Otherwise, the sector will continue to grow," he said.

The Turkish sovereigns due 2030 were quoted at 142.875 bid, 134.5 offered.

Many feel that because of the progress in the investigation of the consulate shootings "political risks are going to come down," the strategist said.

In Ukraine, the Yulia Timoshenko bloc survived a confidence vote on Friday as opposition leader Viktor Yanukovich was unable to muster the support necessary for new elections.

Yanukovich and his Party of Regions accused Timoshenko of mismanaging the economy and allowing rampant inflation.

The hrvyna was seen trading at 4.61 to the dollar.

The Ukrainian sovereign bonds due 2016 were seen at 89.375 bid, 90.375 offered.

Elsewhere in Russia, the central bank raised its refinancing rate by 25 bps to temper rising inflation.

The ruble was seen trading at 23.252 to the dollar.

The Russian government bonds due 2030 were spotted at 111.875 bid, 113.5 offered.

High-betas sell in LatAm

A difficult day in the market proved most difficult for the high-beta credits, which saw a flight to quality toward the investment-grade issues.

In Argentina, Peronist Party chairman Nestor Kirchner called on the party's supporters to march in a pro-government rally on Tuesday to oppose a large rally scheduled by the supporters of striking farmers, the Buenos Aires Herald reported.

In his speech, Kirchner called the farmers "a cause of instability" and asked the pro-government side to take up the "fight for democracy," the report said.

"Argentina got slammed," a strategist said.

The 8.28% Argentine discount bonds due 2033 lost 1 point to 72.75 bid, 73.25 offered.

Investment-grade Brazil saw its 11% bonds due 2040 trade at 131.5 bid, 131.7 offered.

Even as oil has whipped around, Venezuela has remained very stable, the strategist said, although the benchmark 9¼% sovereigns due 2027 traded very lightly on Friday.

SM Investments prices $350 million

Also in Asia, SM Investments Corp. priced $350 million five-year bonds at par to yield 6¾%.

UBS acted as bookrunner for the bonds, which have a put option in three years.

Proceeds will be used to refinance existing debt.

SM Investments is a Manila, Philippines-based holding company with positions in retail and finance.

"We are very pleased with the outcome of the issue at the back of a very cautious investment environment," said SM president Harley Sy in a statement.

"We thank the investors for supporting SM and for their confidence that we will deliver on our medium- to long-term plans, keeping in mind the challenges that the global environment presents to all of us," he added.

"I was surprised about that one," a strategist said.

"It was priced very close to the sovereign and it's an unrated credit," he said.

"Maybe it's the put that's attractive," he added.

Asia secondary mixed

Asian credit traded mixed on Friday, but inflation still made itself the key issue in the major economies of the region.

In the Philippines, during April the central bank recorded $269 million in inflows of foreign direct investment compared to $106 million in April 2007, the central bank said in a press release.

The amount brings the total inflows for the first five months of the year to $299 million.

The peso was seen trading at 45.52 to the dollar.

In Indonesia, also during the first five months of the year, bank lending increased 31.4% to $120 billion compared to the same period of 2007, the central bank said, according to the Jakarta Post.

Since the beginning of 2008, lending has increased 9.4%.

In May, the trade and industrial sector was responsible for 41.3% of the borrowed capital. The sector has also seen the most rapid growth since the beginning of the year.

The sector has grown by about 25 trillion rupiah in 2008.

The rupiah was seen trading at 9,071.18 to the dollar.

Elsewhere in India, prime minister Manmohan Singh announced that his government will face a confidence vote on July 22.

The decision came as the communist party withdrew from the coalition after the government signed a nuclear cooperation deal with the United States.

If the government suffers a loss in the upcoming vote, the country will go to the polls for early elections and the deal with the United States will be in jeopardy.

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