Emerging markets sink slowly; EMBI+ hits year's wide; Ecuador down; investors eye end of roadshows

By Aaron Hochman-Zimmerman

New York, Sept. 9 - Emerging market bonds fell lower and lower as the volatile trading session progressed on Tuesday.

Choppy trading conditions had investors jumping out of the water, as the sector found its way to new wides for the year, according to JPMorgan's EMBI+ index. The EMBI+ calculates the amount of extra yield investors will demand to hold assets in emerging market debt.

The flight to quality sent investors running to Treasuries and away from emerging markets, as the sector was pulled wider by 15 basis points to a spread of 330 bps.

At the trading desks, Ecuador was seen leading the way down after comments by the country's president spooked investors.

The benchmark bonds due 2030 hemorrhaged 3 points.

Meanwhile in the primary, investors waited as South Korea plans to end its roadshow for a 10-year sovereign on Wednesday, while Brazil's Telemar Norte Leste SA is expected to price its new benchmark-sized deal.

In the U.S. markets, equities' nosedive put volatility on a steady climb throughout the session to end higher by 2.83 at 25.47, according to the VIX index. The index is a frequently used gauge of market volatility.

High-betas drag down LatAm

Like the other sectors, Latin American issues bounced lower on Tuesday.

"Most everyone is much wider today," said Enrique Alvarez, a Latin America debt strategist at think tank IDEAglobal.

"If anything Colombia looks stagnant," he said, considering 'stagnant' a compliment.

Unlike other credits, prices were holding even as spreads widened.

For the rest of the sector, "high-beta is obviously leading the market to the downside," he said, as U.S. Treasuries saw a flight to quality and the broader market saw a "renewal of risk aversion."

In Brazil, president Luiz Inacio Lula da Silva continued to host Argentina president Cristina Kirchner on her visit to Brazil as the two signed agreements on energy, trade and public works, according to the Buenos Aires Herald.

"I'm going to make every possible effort to continue the integration plan with Brazil," Kirchner said.

Some of the projects the two plan to undertake include the construction of dams along the Uruguay River, which forms part of the border between the two countries.

Construction on the first dam is expected to begin in two years, the report said.

The 8.28% Argentine discount bonds due 2033 were damaged by 1.625 points to 70.25 bid, 71 offered.

The 7 1/8% Brazilian government bonds due 2037 lost 0.5 point to 110.75 bid, 110.95 offered.

Meanwhile in Venezuela, the falling price of oil was not helped by the recent announcement of joint naval exercises with Russia, Alvarez said.

"That's not a positive," he said.

Also, OPEC's decision to leave oil production at the current levels "is a price negative at this juncture" for Venezuela, he said.

Light sweet crude was seen trading as low as $102 per barrel.

The 9¼% Venezuelan sovereigns lost 0.375 point to 89.5 bid, 90.5 offered.

Elsewhere in corporates, Mexico's Maxcom Telecommunicacciones SA de CV was the most active issue with $16 million traded, a trader said.

The 11% notes due 2014 were lower by just 0.25 point at 104.5 bid, but with no major company news, "it is pretty unusual for them to be the volume leader," he said.

Correa comments sink Ecuador

In Latin America, the major mover was Ecuador, which was "down heavily," IDEAglobal's Alvarez said.

In a local radio interview, president Rafael Correa was asked what he would do to replace oil revenues as crude prices continued to fall.

Correa's vague answer allowed many to believe he would defer external debt payments to replace lost oil revenues, Alvarez said.

The answer felt like a typical Correa "I launch into a threat and then I take it back" scenario, he said.

The 8% Ecuadorian bonds due 2030 sank by 3 points to 83.5 bid, 85 offered.

Emerging Europe shaken

"Volatility is renewed," a trader said about Tuesday's session for emerging European credit.

"Everything is bouncing around," he said, although "Turkey is a slight outperformer."

Turkey's bonds have been a volatile presence in the market since the new sovereigns due 2019 were printed last Wednesday.

After reaching 152.375 bid on Monday, the Turkish sovereigns due 2030 were seen at 151.5 bid, 152 offered.

Elsewhere, "Russia is all over the place," the trader said.

On Tuesday, Russia announced that close to 7,500 troops will remain in Georgia's breakaway regions of Abkhazia and South Ossetia.

Monday, president Dmitry Medvedev told French president Nicolas Sarkozy that he will withdraw Russian forces from Georgia proper.

Russian officials gave no dates but stated that garrisons in Abkhazia and South Ossetia will be long term.

The Russian government bonds due 2030 slipped 0.3 point to 110.625 bid, 110.875 offered.

In corporates, talk has picked up regarding a possible new issue from Russia's VTB Bank, a trader said.

However, a syndicate official of a bank believed by some to be involved with VTB denied any knowledge of a new deal.

CE4 unwinding

Also in emerging Europe, the countries of the Central European 4 have been "pretty bad on the risk aversion" over the last few sessions, the trader said.

The traditionally stable credits in Hungary and Poland have been some of the hardest hit, he said.

Hungary has seen some of the most widening based on the weakness of the forint as currency traders have divested from the euro.

For a long time Hungary's credits benefited from "technical tightening and that's completely snapped," the trader said.

"Generally the currency has performed pretty poorly," he said.

The forint was seen trading at 170.237 to the dollar.

The Hungarian five-year CDS had been stable between 125 bps bid and 130 bps bid, but hit a wide of 166 bps bid on Tuesday.

Asia hits last week's wides

In large part on Tuesday, Asian traders sat back and watched the prices slip lower.

"The market is very, very nervous," a trader said, especially after a particularly difficult overnight session for high-yield issues, "which just carried on into our session," he said.

"We're back out to the wides of last week," he said, although "the market is more orderly now than it was then."

Still, "the one sector that continues to hold in incredibly well is sovereign cash," he said.

According to some, it may be holding so well that the Philippines may not need to issue any more sovereign paper in 2008.

The trader felt the peso's success of misfortune has little influence over debt issuance.

"It's not a factor on issuance," he said, adding that if the market is strong the government will issue, if it weak, they will not.

Also in the Philippines, the government announced it will add to subsidies to help convert the country to biofuels, the Manila Times reported.

Already PHP 49.1 billion has been set aside for developing alternative fuels, according to senator Juan Miguel Zubiri.

Also, Zubiri said that the country's PHP 1.415 trillion 2009 budget will place emphasis on energy and housing.

"Construction and the shelter sectors are known as good generators of other economic activities and a good supplier of steady stream of jobs. Most important, it satisfies a basic need of a Filipino family," Zubiri said in the report.

The Philippine government bonds due 2030 were spotted at 129.5 bid, 130 offered.

In Pakistan, more chatter was heard surrounding the possible new sukuk sovereign, but generally there is only an "unclear market picture at the moment," the trader said.

"They're organizing some multi-lateral funding, but they keep saying they're not going to the IMF," the trader said.

The benchmark Pakistani credit due 2017 continued to suffer and was seen at 60 bid, 63 offered.

In Thailand, prime minister Samak Sundaravej was ordered to leave office by judge Chat Chonlaworn for accepting a fee to appear on a television cooking program.

By appearing on the show, Samak "violated Article 267 of the constitution," the court found.

Still, the ruling coalition has promised to reinstate the prime minister.

Also in Asia, Indonesia's bonds due 2017 were quoted at 101.75 bid, 102.25 offered.

In corporates, South Korea's MagnaChip Semiconductor was hurt in the floundering market.

The 6 5/8% notes and the floating-rate notes, both due in 2011, were slammed for 10 points, falling to 46 bid.

The 8% notes due 2014 plummeted 13 points to 23 bid after the chipmaker lowered its earnings guidance on Monday.

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