Emerging markets tighter; Argentina leads high-betas; Severstal talks benchmark

By Aaron Hochman-Zimmerman

New York, July 21 - Emerging markets kept on rolling with the momentum leftover from last week even as Wall Street earnings were unimpressive.

"It's been fairly solid day," said an emerging markets strategist, "spreads are generally tighter."

In trading, Argentina was out in front of the high-beta credits as it continued to bounce amid a political tempest which shows no signs of passing in the near-term.

Still, in the primary, the market's positive and more aggressive tone gave Russia's OAO SeverStal a chance to push its new benchmark issue.

The deal was talked in the 10% area.

In the broader market, equities eased, but volatility still managed to shed 1.00 to 23.05, according to the VIX index. The index is a common yardstick of market volatility.

As a sector, emerging markets tightened by 3 basis points to a spread of 288 bps, 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 clings to rally

Trading in Latin America held onto the upward trend left over from last week even as earnings took the steam out of the equity market.

In Venezuela, a source said he felt optimistic about the political climate as president Hugo Chavez has tempered his rhetoric ahead of regional elections in November.

However, in the long-term the country may be vulnerable to a sustained drop in oil prices, he said.

Also, the rumored debt buyback program is likely still on the table after being delayed by a change of cast in the finance ministry, the source said.

Elsewhere entirely in Venezuela, Hugo Chavez was heard to have a tender offer for Spain's king Juan Carlos on Monday, but not in the sense of a financial transaction, the BBC reported.

While discussing his upcoming plans to visit Spain, Chavez offered the king a hug, although he maintained he will not shut his mouth.

Shouting between the two at last November's Ibero-American summit in Chile led to the king telling Chavez to "shut your mouth."

In trading Monday the 9¼% Venezuelan sovereign bonds due 2027 slipped 0.25 point to 92.25 bid, 92.75 offered.

In Colombia, president Alvaro Uribe's government will not hold a referendum vote to determine if presidential elections are warranted.

Uribe was elected to his second term in office in a 2006 landslide and has said he may run for a third term in 2010.

Also in Latin America, Brazil's 7 1/8% bonds due 2037 were quoted at 109.25 bid, 109.75 offered.

Argentina short on solutions

Argentinean farmers met on Monday to discuss how they will move forward after the defeat of the government's export tax proposal, according to the Buenos Aires Herald.

Despite the victory for the farmers, the crisis is not likely to ease soon, a market source said and the economic slowdown will begin to weigh on the country's fundamentals in the coming months.

"The government has not solved its problems," a strategist said, "the government is going to have to raise taxes somehow."

Still, in the short-term, Argentina's bonds are expected to rebound.

On Monday the 8.28% Argentine discount bonds due 2033 took on 0.75 point to 76.5 bid, 77 offered.

SeverStal talks benchmark

In the reinvigorated primary, OAO SeverStal (Ba2/BB/BB) talked its benchmark-sized dollar-denominated five-year loan participation notes in the 10% area.

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

SeverStal is a Cherepovets, Russia-based steel producer.

Many investors believe that SeverStal may price up to $1 billion.

"It should go well," a strategist said about the issue, noting that it is fairly priced.

Meanwhile in Asia, Singapore's Fraser & Neave Holdings Bhd. priced S$100 million five-year fixed-rate notes at par to yield 4.55%.

Fraser and Neave is a Singapore-based bank and real estate developer.

Emerging Europe winds tighter

Traders in emerging Europe conducted business with a positive tone on Monday.

In Russia, the government's foreign debt measured $41 billion as of July 1, or 8.7% lower than the $44.9 billion it owed on Jan.1, the finance ministry said, according to the RIA Novosti News Agency.

The country's eurobonds have an estimated value of $28.2 billion while the domestic foreign currency-denominated bonds are valued at $1.8 billion, the report said.

The Russian government bonds due 2030 dropped 0.25 point to 112.25 bid, 112.5 offered.

Meanwhile in Turkey, prime minister Recep Tayyip Erdogan defended the reputation of the military after it has come under scrutiny for investigating officers in connection with the suspected Ergenekon coup attempt.

"I don't think that any Turkish citizen or institution can think of being engaged in an attack on the military. It is not possible for us to let anyone attempt an illegal attack against the military," Erdogan told reporters Saturday, according to the Turkish Daily News.

The air force prosecutor's office is believed to be investigating the national intelligence service over a report it released three years ago showing what the report called an "illegal structuring" inside the armed forces.

Despite increasing political confusion and rising inflation, there is little risk priced in, a market source said, adding that the buoyed price forces a negative outlook on the credit.

Asia cools in late trading

Asia "rallied, [but] closed probably a little weak," a trader said as disappointing earnings came in from American Express Co. and a negative outlook was issued by Apple Inc.

Whether or not the credit market in Asia can sustain a rally it will largely be influenced by "more earnings-based movements," he said.

Elsewhere, bonds sold in Indonesia will become more transparent when the new regulatory agency PT Penilai Harga Efek Indonesia stands up in 2009, according to the Jakarta Post.

The agency will serve to distribute benchmark prices on sovereign, corporate and Islamic bonds.

It will provide standardized daily prices for debt securities modeled on systems in place in Mexico, South Korea and Malaysia, the report said.

The new office has already acquired half of the 30 billion rupiah it will need to begin operations.

The Indonesian bonds due 2017 were spotted at 97.875 bid, 98.625 offered on Monday.

Also in Pakistan, the government hiked gasoline and diesel prices by 14%, which is the largest increase in the country's 61-year history and the sixth hike this year, according to the BCC.

The new government has fought to keep its coalition together as it faces civil unrest and a stumbling economy.

Meanwhile in corporates, South Korea's MagnaChip Semiconductor bonds were damaged as some investors were inclined to steer clear of the technology sector, according to a market source.

The 6 7/8% bonds due 2011 dumped 5 points to 54.6 bid, while the 8% bonds due 2014 were seen trading at 33 bid.

Philippine T-bill rates jump

In the Philippines, soaring inflation obliged the government to raise the rates it will accept for its six-month and one-year short-term domestic Treasury bill auctions, the Treasury Department said in a statement.

In the auction, held Monday, bids for PHP 3 billion of the six-month paper averaged 6.48% or 1.8% higher than the most recent auction on Jan. 21.

Still, banks were willing to buy as much at PHP 4.5 billion, the Treasury said.

In the secondary market, the paper currently trades at a yield of 6.8%.

The one-year bill saw bids increase to 6.98% from the 6.74% the government accepted on July 7.

Only PHP 650 million of the one-year notes was offered as total bids from banks only added up to PHP 2.7 billion.

The lack of interest would have driven yields to 7.2% which the auction committee considered "too high," the Treasury statement said.

The Philippine sovereign bonds due 2030 jumped 1.25 points to 124.875 bid, 125.375 offered.

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