Emerging markets creep tighter; Turkey bonds leap; Brazil's Telemar Norte talks benchmark offering

By Aaron Hochman-Zimmerman

New York, Sept. 8 - Investors in emerging market credits pulled spreads tighter while traders on Wall Street spent the day enjoying the ride provided by the Treasury Department bailout of Fannie Mae and Freddie Mac.

The week also opened with movement in the primary as Brazil's Telemar Norte Leste SA issued guidance for its upcoming benchmark issue.

Meanwhile, syndicate officials managing South Korea's new sovereigns began a roadshow for the deal in Singapore and London.

In trading, issues performed well on Monday but left the big gains and the glory to the equity side.

Turkey's benchmark bonds due 2030 leapt around, a market source said, but toward the close they were seen higher by 2.875 points, the source said.

In the major markets, despite big gains for equities, volatility was up for most of the afternoon but faded to end lower by 0.42 at 22.64, according to the VIX index. The index is a common measure of market volatility.

As a sector, emerging markets was able to tighten along with Treasuries by 5 basis points to a spread of 319 bps, according to the EMBI+ index. The EMBI+ determines the amount of extra yield investors will demand to hold assets in emerging markets debt.

Telemar Norte talks, South Korea shows

The primary pipeline proved it can keep the trickle of new issues flowing as Telemar Norte Leste (Baa3//BBB-) issued talk for its $1.5 billion to $2 billion notes due in 2013 and 2018.

The five-year notes were talked in the 7¾% area, and the 10-year notes were talked in the 8½% area.

The roadshow ends Tuesday with pricing expected Wednesday.

Citigroup, Banco Itau and Banco Santander will act as bookrunners for the deal.

Proceeds from the sale will be used to fund the $3.5 billion equivalent acquisition of Brasil Telecom Participacoes SA as well as to refinance debt.

Telemar Norte is a Rio de Janeiro-based telecom umbrella group.

Also in the primary market, the expected sovereign from South Korea began its roadshow, but the news of Telemar's talk was not heavily influential, a syndicate official said.

"I think the sovereign versus corporate differential has been adjusting for some time," he said.

"I don't think a LatAm corp has much influence on a South Korean sovereign," he said.

Although, across the board "new issue concessions are wider," he said.

Despite positive investor reaction to the Treasury moves over the weekend, "the market is still a choppy and challenging place," he said.

Still, "the feedback from the roadshow has been very positive," he said.

Emerging Europe unglitched

Emerging Europe performed well as London recovered from the computer glitch that halted the equity trade for nearly the entire session, reports said.

Meanwhile in emerging market credit, issues narrowed, led by Turkey, which ended a rollercoaster day to the upside.

In Turkey, on the day of big moves on Wall Street related to the bailout of mortgage lenders Fannie Mae and Freddie Mac, Turkish bonds saw a volatile trading session, a market source said.

The benchmark bonds due 2030 took some of the biggest losses of the major emerging market issues on Friday but bounced back to begin the week on Monday.

The Turkish sovereigns due 2030 jumped 2.875 points to 152.375 bid, 152.875 offered.

"This one is moving around a lot," the market source said.

Also in emerging Europe, Tomislav Nikolic, the leader of Serbia's chief opposition party, the Serbian Radical Party, resigned after party members rejected his moves toward the European Union.

The party members decried to Nikolic's desire for Serbia to join the E.U. as it would require Serbia to give up its claim on Kosovo.

Russia's military moves

In Russia, president Dmitry Medvedev agreed to withdraw his army from Georgia in order to have them garrisoned in the breakaway regions of South Ossetia and Abkhazia after about 200 E.U. observers arrive in the area.

The last team of observers is expected to be in place by Oct. 1.

Medvedev accepted the withdrawal during a meeting in Moscow with French president Nicolas Sarkozy, who also holds the E.U. presidency.

The Russian government bonds due 2030 were better by 0.5 point at 110.95 bid, 111.05 offered.

Elsewhere, the Russian navy announced plans to take four warships and up to 1,000 troops to the waters off Venezuela in order to hold joint exercises with the Venezuelan navy.

Both countries have recently seen tensions with the United States escalate over the Russian invasion of Georgia and the reactivation of the U.S. navy's fourth fleet in Latin America.

Russian officials denied that the exercises were intended as a political show for the benefit of any other country.

However, the outspoken president Hugo Chavez taunted the United States.

"Go ahead and squeal, Yankees," he said.

The 9¼% Venezuelan sovereign bonds due 2027 was seen unchanged at 90.15 bid.

Brazil, LatAm inch higher

In the rest of Latin America, credits narrowed as U.S. equities charged ahead on Wall Street.

Despite the guidance issued by Brazil's Telemar Norte, the new issue market still broadly gave investors an uneasy feeling, a syndicate official said.

Elsewhere in Brazil, president Luiz Inacio Lula da Silva pledged to wipe out poverty with the revenue from the country's recently discovered oil reserves.

Test drilling on Sept. 2 amounted to "the opening of a direct bridge between natural wealth and the eradication of poverty," Lula told reporters, according to the BBC.

He promised to help create a sophisticated and responsible oil industry that benefits the Brazilian people.

"We won't allow ourselves to be dazzled and go spending money that we still don't have on silly things," he said.

Also in Brazil, Argentina's president Cristina Kirchner arrived on Sunday for the opening of the joint Argentine-Brazilian Impsa wind turbine power plant.

The 11% Brazilian government bonds due 2040 added 0.25 point to 132.1 bid.

Asian spreads wind tighter

Asian trading posted moderate successes amid a rally atmosphere for equities, a trader said.

In the Philippines, a private think tank predicted the central bank will turn off track from its series of rate cuts, which brought borrowing and lending rates to 6% and 6.75%, respectively.

"Emerging growth concerns have presumably prompted monetary authorities to reassess their strategy hoping to move to a more neutral stance and relax from a very strong inflation fighting position, which they had been holding for the past few months," Global Source said, according to the Manila Times.

Due to the weakening peso, some expect a 25 bps rate hike, but Global Source predicts no changes to the key rates during the policy meeting on Oct. 9.

The peso was seen trading at 46.533 to the dollar.

In Indonesia, business leaders have expressed approval for the new income tax laws that passed through the legislature last week, according to the Jakarta Post.

The law taxes businesses at a 28% flat rate in 2009 rather than a progressive tax that reaches a rate of 35%.

Rates in 2010 are expected to be lowered to 25%.

"The (new) income tax law is in line with businesspeople's aspirations. It will promote a favorable investment climate," M.S. Hidayat, chairman of the Indonesian Chamber of Commerce and Industry, said in the report.

Hidayat continued his praise of the new rates.

"There is nothing negative in the (new) tax law," he said, adding that revenue soared by 400% in Russia after corporate taxes were cut to 15% from 40%.

Meanwhile, Pakistan elected new president Asif Ali Zardari, the widower of former prime minister Benazir Bhutto, on Saturday.

In the tally, Zardari won 481 out of 702 total votes cast by secret ballot in the national assembly as well as four other provincial assemblies.

Also in China, an election in Hong Kong kept veto power in the hands of the city's pro-democratic bloc.

The bloc won 23 of 30 seats on the legislative council, according to the BBC.

Some had expected nationalist parties to capitalize on heightened feelings of patriotism in the wake of the Beijing Olympics.

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