Emerging markets blasted again; EMBI+ breaks 400 bps; Venezuela bonds sink; primary activity silent

By Aaron Hochman-Zimmerman

New York, Sept. 16 - For another day emerging markets could not escape the landslide touched off in the major markets by Lehman Brothers Holdings Inc.'s bankruptcy and American International Group Inc.'s illiquidity.

Similarly to Monday's session, emerging markets had little to do with their own demise.

"There're bigger issues out there," which must be solved before emerging markets can resume control of its own fate, a trader said.

In trading, the high-betas of Latin America dug the deepest for the second straight day, followed by emerging Europe and Asia, in keeping with the recent pattern.

Venezuela's benchmark bonds were pounded out of 4.8 points.

The primary market, which struggled before news of Lehman, Merrill Lynch and AIG hit over the weekend, had its fate sealed and will have to wait until stability returns to the financial world.

Stability was nowhere to be found in the major markets as equities bounced, but finally ended higher, after the Federal Reserve left interest rates unchanged. Volatility sank by 1.40 to 30.30, according to the VIX index. The index is a frequently used gauge of market volatility.

Investors put their flight to quality into afterburner as emerging markets were blown wider by 21 basis points to a spread of 401 bps, according to JPMorgan's EMBI+ index. The EMBI+ determines the amount of extra yield investors will demand to hold assets in emerging markets debt.

New lows for high-betas in LatAm

"The high-betas have been decimated," said Enrique Alvarez, a Latin America debt strategist at think tank IDEAglobal.

The usual suspects of Argentina, Venezuela and Ecuador have seen close to negative 10% returns, he said.

"You have a basic contagion effect where markets have been forced to illiquidate," he said.

The 8.28% Argentine discount bonds due 2033 sank 2.25 points to 59 bid, 61.5 offered.

The 9¼% Venezuelan sovereigns due 2027 were slammed for 4.8 points to 72.6 bid, 73.95 offered.

In the core markets, Brazil, which was "in need of deleveraging," has been leading the way down, Alvarez said.

The 11% Brazilian government bonds due 2040 bled 3 points to 125 bid, 125.3 offered.

High grade clings to Treasuries

Investment-grade credits Mexico and Chile managed to largely avoid the whirlpool caused by the sinking of the high-beta threesome of Argentina, Venezuela and Ecuador.

While the high-beta part of the sector is firmly tethered to the losses brought on by the major market financial crisis, the investment-grade names have been considerably safer "due to their lockstep with U.S. Treasuries," Alvarez said.

Even for the high-yield credits, by the end of the day, "we're done with selling," Alvarez said, but as traders continued to put the losses into perspective, they grappled with the idea that there will be no resolution for emerging markets until the major markets put their house in order.

The 5 5/8% Mexican sovereign bonds due 2017 lost only 0.9 point to 98 bid, 98.9 offered.

Asia mounts afternoon recovery

After a drastic overnight sell-off and an "incredibly choppy" morning, Asian trading "recovered quite nicely this afternoon," a trader said.

Spreads of investment-grade swaps swung by 10 bps to 15 bps throughout the day, while cash prices varied by 1.5 points in either direction, he said, "but we're going out on a firmer footing."

Despite Asia's relative success, in the larger market "there're clearly some pretty heavy short positions out there," he said.

In the Philippines, the Bureau of Internal Revenue announced a new collection goal of PHP 801 billion in 2008 after it disclosed that it will not be able to meet its original goal of PHP 845 billion.

Commissioner Lilian Hefti blamed the global economic slowdown as well as new exemptions for minimum wage-earners for the collection shortfall, according to the Manila Times.

For budgetary purposes the Finance Department said it must hold to the original goal of PHP 845 billion.

"It's hard to make some revisions this time. We're already in the final months of the year," finance secretary Margarito Teves said in the report.

The Philippine sovereign bonds due 2030 dropped 1 point to 127 bid, 128 offered.

In Indonesia, president Susilo Bambang Yudhoyono called a meeting of his top economic advisers to discuss the financial crisis emanating from the United States, the Jakarta Post reported.

Yudhoyono asked the ministers to be prepared for any negative circumstances, but most importantly he asked them to cooperate.

"Besides preparing the anticipatory step, we must also create a synergy. I really want consultation and a harmonization of policies between the central bank and the Finance Ministry as best as possible," he said, according to the report.

The Indonesian government bonds due 2017 gave up 3 points to 97 bid, 99 offered.

Also in Asia, Pakistan's military was ordered to fire on U.S. troops if they crossed the border from Afghanistan.

Senior officers of the United States and Pakistani armed forces are scheduled to meet Wednesday in order to ease the pressure in the border region.

The Pakistani bonds due 2017 were quoted at 51 bid, 54 offered.

Emerging Europe pounded

Emerging Europe was hit again, but harder on Tuesday than it was forced to tolerate during Monday's session.

Volatility and a plague of selling spread from the Asian overnight to drag under the market.

In emerging Europe itself, Georgia released tapes that it claims offer proof that Russia provoked its attack on South Ossetia.

The tapes are allegedly of a South Ossetian border patrolman reporting Russian activity on the Georgian side of the border.

Russian officials dismissed the claims that its activities were improper.

The Russian government bonds due 2030 were pushed lower by 4.5 points to 103.3 bid, 103.45 offered.

Also, Georgia has been granted a $750 million loan from the International Monetary Fund.

The announcement was made during a visit to Tbilisi by NATO secretary-general Jaap de Hoop Scheffer.

At a press conference de Hoop Scheffer indicated that he would recommend Georgia's "accelerated" entrance into NATO, according to reports.

Elsewhere in the Commonwealth of Independent States, the ruling coalition in Ukraine has officially collapsed, according to parliament speaker Arseniy Yatsenyuk.

President Viktor Yushchenko's Our Ukraine bloc walked out of a partnership with prime minister Yulia Timoshenko's bloc on Sept. 3.

The legislature now has 30 days to form a new coalition or the president may decide to dissolve the cabinet and call for new elections.

Former Orange Revolution rivals Yushchenko and Timoshenko were able to overturn a fixed election won by the current opposition leader Viktor Yanukovych of the Party of the Regions.

However, the president and prime minister have recently been at odds as Timoshenko is considered the leading challenger against Yushchenko in the 2010 elections.

Turkey damaged after positive report

Meanwhile in emerging Europe, Turkey made strides toward compliance with the European Union's economic standards, according to a report by the State Planning Organization, the Turkish Daily News reported.

Turkey bested the requirement of an indebtedness need of minus 3% of GDP by posting a need of minus 1.2%.

Also, the debt stock rate of 38.8% remained clear of the 60% E.U. limit.

However, inflation remained a problem, according to the report.

The 10.5% inflation of the lira is almost triple the E.U.'s Maastricht Criteria for inflation.

According to the criteria, the inflation rate may not surpass the average rate of the three countries boasting the lowest rates by more than 1.5%.

The lira was seen trading at 1.263 to the dollar.

The Turkish government bonds due 2030 were crushed for 7.2 points to 140.55 bid, 141.05 offered.

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