Emerging markets bashed; spreads widen; Mexico pulls 21-year, prices $1.5 billion five-year bonds

By Aaron Hochman-Zimmerman

New York, Feb. 11 - Emerging markets suffered through another difficult day of trading as investors were baffled by Mexico's announcement and retraction of one of its two freshly proposed bonds.

The $1.5 billion five-year bond offer survived and priced at 425 basis points over Treasuries. The 21-year deal, a duration which has fallen out of favor, was pulled.

Prices across the board reacted negatively, but the poor sentiment had help from the headlines as people continued to talk about the action on Capitol Hill.

"There wasn't enough detail to make anyone happy," a syndicate official said about Treasury secretary Tim Geithner's Tuesday speech.

Also as Wall Street executives were grilled by congressmen, stocks recovered slightly and volatility dropped by 2.14 to 44.53, according to the VIX index. The index is a frequently used yardstick of market volatility.

As a sector, emerging markets pushed wider by 12 bps to a spread of 656 bps, according to JPMorgan's EMBI+ index. The EMBI+ calculates the amount of extra yield that investors demand to hold assets in emerging market debt.

Mexico prices $1.5 billion

In Latin America all the attention went to Mexico on Wednesday.

Mexico City initially planned a 21-year and a five-year bond offering, but by the afternoon the issuer pulled the 21-year offer.

The $1.5 billion five-year bond (Baa1/BBB+/BBB+) still managed to price to yield 6%, or Treasuries plus 425 bps.

Credit Suisse, Deutsche Bank and HSBC will act as bookrunners for the registered deal.

"It's wacky," a syndicate official said.

"We're all trying to get our hands around it," he said, because usually "Mexico can do no wrong."

Some thought they were just "trying to replace what they had lost" after spending nearly $1.1 billion defending the peso. Others thought they were trying to stay ahead of a possible rating downgrade.

"I don't think that's going to happen," the syndicate official said about the downgrade.

"It was a very bad market read" or they were just "asking for too much," he said.

The 8 1/8% Mexican bonds due 2019 lost 1 point to 94.9 bid while the current bonds due 2014 lost 1.875 points to 100.375 bid.

LatAm slides

Meanwhile, Venezuela held up reasonably well as oil continued to suffer.

The 9¼% Venezuelan government bonds due 2027 added 0.75 point to 51.25 bid.

"In the grand scheme of all of this, it's not too bad," the syndicate official said.

Also, Argentina's 8.28% discount bonds due 2033 lost 0.65 point to 31 bid, 33 offered while Brazil's 11% bonds due 2040 were seen at 123.25 bid.

Asia quiet, Indonesia deal in doubt

Asia spent another "quiet day" watching the action on Capitol Hill and "trying to rally off [a bounce from] an equity low," a trader said.

"I don't think it was a really convincing move," he said after the close.

There was some news that Indonesia may be delaying its deal, he said, and the bonds saw a small 1-point to 2-point rally as a result.

Also in Indonesia, the House of Representatives ordered Bank Indonesia to create an escrow account to guarantee the deposits of Bank Century customers, the Jakarta Post reported.

Regulators discovered 62 unauthorized accounts, which were used to illegally funnel deposits to Robert Tantular, one of Century's owners.

The Indonesian government bonds due 2018 were better by 1 point at 81 bid.

In the Philippines, the bonds continued to hold their higher levels even as spreads across the category were 5 bps to 10 bps wider.

The Philippine sovereign bonds due 2030 were unchanged at 114.75 bid.

Pakistan's bonds due 2017 were seen trading at 43.

Also in India, the government arranged for $700 million in nuclear aid from Moscow to include a supply of Russian uranium pellets.

The Nuclear Suppliers Group lifted sanctions on uranium deliveries to India in September, the BBC reported.

Emerging Europe drops again

Emerging Europe was hurt even as U.S. equities attempted a rally after Tuesday's painful session.

In Turkey, Ankara's own budget deficit for January rifled up 465.8% to $1.81 billion compared to January 2008, the Finance Ministry said, according to the Hurriyet Daily News.

Spending for the month hit $11.4 billion in January while government income only reached $9.6 billion.

The Turkish government bonds due 2030 were pounded for 2.5 points to trade at 137.375.

In Russia, the government reached agreements with the government of Poland to arrange for more gas deliveries from the national gas firm OAO Gazprom, the Itar-Tass News Agency reported.

The final amounts of the new deliveries will be determined at meetings in Warsaw on March 10-11.

The Russian sovereigns due 2030 lost 0.2 point to 89.85 bid.

Meanwhile in Ukraine, president Viktor Yushchenko's economic advisers warned that the country may be denied the second $1.9 billion portion of its International Monetary Fund loan, according to the BBC.

Kiev is obligated to cut its budget deficit to 1% of its GDP in 2009 but will likely only cut the deficit to 3% of the GDP, said Roman Zhukovsky of the economic office.

"As we are not going to honor the engagements set out in the memorandum, it will be very difficult to count on the second tranche of the loan," said Zhukovsky in the report.

Kiev already received a $4.5 billion piece of the total $16.4 billion loan in November.

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