Emerging markets flat to mixed; Asia suffers weak overnight; Argentina, Venezuela benchmarks weaken

By Aaron Hochman-Zimmerman

New York, Sept. 23 - Emerging markets bond trading activity was hamstrung again on Tuesday as investors were forced to wait for direction from the U.S. government, which deliberated over its proposed $700 billion bailout plan.

Trading was almost universally slow as "people are trying to digest whether there's the political will for the bailout package," a trader said.

No one wants to see a hasty and ineffective plan, but "drift or delay can only be bad," he said, as no solid news presented itself on Capitol Hill.

The expectation of a bailout itself was not enough to prop up markets, the trader noted.

"You've got to keep feeding them," he said, "keep growing the beast."

Even with the bailout, "the prospect for a decent end of the year is gone," he said.

In trading, Asia reversed its typical outperformer role, while issues in the other sectors were generally lower by about 1 point.

The benchmark issues of Argentina and Venezuela were both lower by 0.75 point.

Meanwhile, jitters in the equity market pushed volatility up by 1.87 to 35.72, according to the VIX index. The index is a commonly used measure of market volatility.

Also, the ongoing debate of the government bailout sent investors running for the shelter of Treasuries, which threw emerging market spreads wider by 9 basis points to a spread of 357 bps, according to JPMorgan's EMBI+ index. The EMBI+ determines the amount of extra yield investors will accept to hold assets in emerging markets debt.

Argentina, LatAm slip

"Everything's a touch lower," said Enrique Alvarez, a Latin America debt strategist at think tank IDEAglobal.

Latin America traded slowly on Tuesday as investors and civilians alike were glued to "The Hank and Ben Show," he said, referring to U.S. Treasury secretary Henry Paulson and Federal Reserve chairman Ben Bernanke, both of whom testified before Congress Tuesday.

"There's not a whole lot of definition in the whole environment," he said.

On Monday, Argentina took a bounce from the prospect of a debt restructuring, but that will "move through the Argentine government for a while before it goes to congress," he said.

The consortium of banks that has been formed to handle a restructuring have commitments for about $10 billion of the $18 billion owed, Alvarez said.

There is a true possibility of success for the program, he said, "but we'll see if that sticks."

Success would likely mean coming off of the negative watch list of some of the ratings agencies, he said, not adding huge amounts of money to the government's balance sheet.

In fact, the government would "end up having to fork up money," he said, in order to put the plan into play.

The 8.28% Argentine government bonds due 2033 shed 0.75 point to 67.25 bid, 67.75 offered.

Elsewhere in Latin America Venezuela's 9¼% bonds due 2027 fell 0.75 point to 81 bid, 82.75 offered, while Brazil's 7 1/8% bonds due 2037 gave up 0.9 point to 106.3 bid, 106.9 offered.

Asia off overnight wides

Asia was clearly separated from the trend of outperforming the other emerging market sectors on Tuesday, a trader said.

The sector may have outperformed, "maybe compared to the start of the day," he said, noting that there was "severe widening in the overnight by on average 15 [bps] to 20 bps in sovereign CDS."

On the other hand, "the underperformer again, is in the high-yield space," he said.

The high-yield index traded near 710 bps, or nearly 85 bps wider than tights posted on Friday, he said.

In cash term, prices fell generally by 1 point to 1.5 points from Monday's close.

"It's definitely pretty soft," he said.

In the Philippines, the central bank predicted a rise in foreign investment in 2009 along with a modest recovery in the global markets, the Manila Times reported.

Bank governor Amando Tetangco posted a foreign direct investment estimate of $3.2 billion, up from an expected $2.6 billion in 2008.

"The coordinated actions of central banks of advanced economies will provide stability in the global financial market next year," Tetangco said in the report.

The Philippine government bonds due 2030 were spotted at 126.25 bid, 127.25 offered.

In Indonesia, the Indonesian Chamber of Commerce and Industry was pleased with a deal to allow small businesses access to $4.25 billion in loans.

The chamber of commerce struck the deal with five state-run banks: Bank Mandiri, Bank Mandiri Syariah, Bank Negara Indonesia, Bank Rakyat Indonesia and Bank Tabungan Negara.

Private bank Bank Bukopin will also provide some of the business loans.

The loans are designed to aid the nearly 40 million micro-, small- and medium-sized businesses as operating capital becomes scarce.

The Indonesian sovereigns due 2017 were seen at 95 bid, 96 offered.

Cashing out on Pakistan

Meanwhile, Pakistan president Asif Ali Zardari was in New York to attend meetings of the U.N. general assembly and to meet with president George Bush.

The relationship between the United States and Pakistan has become strained over the conflict in the mountainous border region between Pakistan and Afghanistan.

The U.S. government gave its forces authority to cross the border in pursuit of militants without the permission of the Pakistani government.

"Your words have been very strong about Pakistan's sovereign right and sovereign duty to protect your country, and the United States wants to help," Bush told Ali Zardari at a press conference.

However, the recent assassination attempt against the heads of government by a lesser-known Islamic group and a plummeting stock market has severely shaken the country's paper, the trader said.

"It's heading toward the sort of level where people are going to start demanding cash up front," he said.

The Pakistani bonds due 2017 were quoted at 45 bid, 53 offered.

Emerging Europe 'trying to recover'

Emerging Europe traded mixed on Tuesday as "it's generally been weaker," although "today it's trying to recover a bit," a trader said.

Still, "it's quiet today," he said. In recent days "it feels like there's less going on than ever."

"Russia feels under pressure," he said, along with "all of them, really."

Meanwhile, Russian foreign minister Sergei Lavrov was also in New York to meet with the U.N. general assembly.

Talks are scheduled with U.S. secretary of state Condoleezza Rice, former secretary of state Henry Kissinger and perhaps president George Bush.

Georgia is a likely topic for the meetings as the West still widely objects to the Russian presence in the country.

As the diplomatic meetings were underway, the Georgian military claimed to have shot down an unmanned Russian drone in Georgian airspace.

Russia denied the claim, calling in a "media provocation," according to reports.

Georgia claims to have fired on the drone as it flew south of the de facto border between South Ossetia and Georgia proper.

The Russian sovereign bonds due 2030 gave up 0.75 point to 103.25 bid, 103.5 offered.

Also in the European time zone, nine of South Africa's cabinet ministers joined president Thabo Mbeki by offering their resignations on Tuesday.

However, finance minister Trevor Manuel indicated that he would be willing to serve in the next administration.

The resignations were severely damaging to the reputation of the African National Congress. ANC-leader Jacob Zuma is expected to become the next president.

The South African five-year CDS has hovered near 200 bps bid, a spread which is tighter than last week, the trader said, but 10 bps to 15 bps wider due to the government shake-up.

Elsewhere in Turkey, the government bonds due 2030 lost 0.5 point to 147 bid, 147.5 offered.

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