Emerging markets end mixed; Israel Electric prices $500 million 11-year bonds; spreads creep in

By Aaron Hochman-Zimmerman

New York, Jan. 23 - The emerging markets were in no condition to break the pattern built up over the shortened week.

On Friday, levels dropped in the morning only to return to the previous afternoon's close.

Spreads once again took baby steps inward as Treasury yields rallied, but "the global picture is pretty bad," a London-based trader said; "EM FX is pretty weak, the pound is a pile of rubbish ..."

The Latin American high-betas Argentina and Venezuela provided news but little tangible change in their cash levels or spreads.

The heads in the market were turned by the primary, which was powered by Israel Electric Corp. Ltd. The publicly owned, investment-grade utility priced $500 million 11-year notes to yield 9½%.

From the major markets, U.S. equities managed to end nearly unchanged as volatility was down slightly by just 0.02 to 47.27, according to the VIX index. The index is a frequently used yardstick of market volatility.

As a sector, emerging markets narrowed by 3 basis points to a spread of 667 bps, according to JPMorgan's EMBI+ index. The EMBI+ estimates the amount of extra yield investors will demand to hold assets in emerging market debt.

The EMBI global diversified index, which represents sovereigns and quasi-sovereigns, was also tighter by 3 bps with a spread of 716 bps.

The diversified index has a less strict liquidity rule for inclusion.

Israel Electric prices $500 million

In the primary market, Israel Electric priced $500 million 11-year senior secured notes at 99.158 with a coupon of 9 3/8% to yield 9½% (Baa2/BBB+/).

The deal also priced with a spread of Treasuries plus 684 bps.

Price talk earlier in the day from bookrunners Citigroup and JPMorgan put the yield between 9½% and 9¾%.

Proceeds from the sale will be used for capital expenditures and general corporate purposes.

Israel Electric is a Haifa, Israel-based publicly controlled utility.

The talk issued for the deal was steep, but not relative to the current market, a trader said, just ahead of the deal's pricing.

"It'll need to come looking attractive," he said.

Emerging Europe finishes flat

In emerging Europe, the level of activity ended "all pretty much where it was" on Thursday, a London-based trader said.

"It opened pretty weak and it's been quiet and mixed since then," he said.

Meanwhile, Ukraine president Viktor Yushchenko called for amendments to the recent gas price agreement between the Ukraine's NJSC Naftogaz Ukrainy and Russia's national energy firm OAO Gazprom.

Presidential spokesman Oleksander Shlapak told reporters that further discussions between the sides would persist into the spring.

Yushchenko had been critical of the deal brokered between prime minister Vladimir Putin and his own prime minister Yulia Timoshenko.

The deal arranges for Ukraine to pay a 20% discount to European gas prices, but Russia is allowed to keep the 2008 transit payment. Ukraine pays full price for gas beginning in 2010.

Yushchenko called the deal one-sided, in Russia's favor.

The Russian government bonds due 2030 were unchanged at 89 bid, 89.25 offered.

The Ukrainian bonds due 2016 were also flat at 43 bid, 46 offered.

Elsewhere in the category, Turkey met with representatives of the International Monetary Fund, according to the Hurriyet Daily News.

The sides have yet to determine whether an expected $15 billion to $20 billion loan will be deposited into the central bank or the Treasury, the report said.

The Turkish sovereigns due 2030 were "illiquid," the trader said, and lower by 0.5 point at 141 bid, 142 offered.

LatAm calm amid oil swings

Latin America traded slowly on Friday and continued its moderate and middling pace through to the end of the week.

The volatility, even among the high-betas, was nowhere to be found even as the equity markets thrashed wildly.

"There's really not much," a strategist said.

Venezuela stumbled lightly as crude prices were seen as high as $47 and as low as $42 per barrel.

The 9¼% Venezuelan government bonds due 2027 fell 1.25 points to 54.25 bid, 55.25 offered.

With oil up, the drop may be due to president Hugo Chavez's transfer of $6 billion from the Treasury into the Fonden fund, another strategist said about what he called Chavez's "private slush fund."

"It's very opaque," he said.

Meanwhile in Venezuela, Argentina president Cristina Kirchner met with Chavez to sign a number of agreements strengthening the ties between the two countries, the Buenos Aires Herald reported.

The sides reportedly are close to a deal to finalize compensation for the Venezuelan takeover of Argentine-controlled steelmaker Sidor, ultimately under the corporate umbrella of Luxembourg's Ternium SA, according to the report.

Also in Argentina, "that swap is being taken as good news," the strategist said.

Nearly $3 billion of private loans are being swapped for longer-term government bonds, a market source said.

The result of the swap may trim $1 billion from Buenos Aires' issuance needs in 2009.

The 8.28% Argentine discount bonds due 2033 added 0.65 point to 35.15 bid, 35.75 offered.

Elsewhere, the traditionally more stable credits were, stable.

Brazil's 11% bonds due 2040 were quoted unchanged at 124.5 bid.

Mexico's 6 5/8% bonds due 2017 were quoted at 97.5 bid, 97.9 offered.

Sure-footed Asia trips into weekend

Asia and particularly the Philippines were unable to escape some of the bad news that circulated through the market on Friday.

Even as equities mounted a comeback above 8,000 on the Dow Jones Industrial Average, the ever-stable Philippine bonds due 2030 fell 1.5 points to 109.5 bid, 111.75 offered.

In Indonesia, inflation may fall by 5% by the close of 2009, said central bank senior deputy governor Miranda Goeltom, according to the Jakarta Post.

Slumping demand and commodity prices will chip away at the current official forecast of 6.5% to 7.5%, she said.

The trend will allow the central bank greater room to cut the interest rate from its current perch at 8¾%, she added.

The Indonesian sovereign bonds due 2017 were quoted at 77 bid, 85 offered.

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