Emerging markets sink; Asia holds in; Mexico's funding difficulties rattle LatAm bond market

By Aaron Hochman-Zimmerman

New York, Feb. 12 - Emerging markets dropped again as Mexico remained a drag on Latin America and major market toxicity poisoned emerging Europe.

The market was not encouraged by ailing powerhouse Mexico's recent defeat in its effort to raise funds in the bond market.

The concern is that "if one of the investment-grade names has to pull, then the other credits are not going to have success either," said Enrique Alvarez, a Latin America debt strategist at think tank IDEAglobal.

"That's part of the [bad] stuff," a trader said.

The market's poor performance is only due to everything we have already heard, he said.

On the other hand, in Asia "our stuff is definitely hanging in there," another trader said.

The category continued to outperform emerging markets as it has largely avoided the currency trouble many countries are fighting.

Meanwhile, as equities floundered and then recovered, volatility dropped by 3.28 to 41.25, according to the VIX index. The index is a common measure of market volatility.

As a sector, emerging markets was pulled wider by 8 basis points to a spread of 671 bps, according to JPMorgan's EMBI+ index. The EMBI+ determines the amount of extra yield investors will demand to hold assets in emerging market debt.

LatAm sinks with Mexico

There was "some overhang of weakness" in the category after Mexico's awkward day in the primary market on Wednesday, said IDEAglobal's Alvarez.

There was "a lack of interest" in the long bond, Alvarez said.

In the current market environment "five or 10 [years] is the best-case scenario," he said.

On Wednesday, Mexico priced a $1.5 billion five-year bond offering but pulled a planned 21-year offering, a duration which has fallen out of favor.

The original 5 7/8% Mexican bonds due 2014 traded down 1 point to 99.75 bid, 100.75 offered.

As the country has to deal with a "recessionary environment" on the U.S. southern border, "Mexico is soft," Alvarez said.

Elsewhere in the category, Venezuela, which has held up reasonably well, "drifted to the downside" on Thursday, Alvarez said.

As it heads into Sunday's referendum vote, to severely extend president Hugo Chavez's term limits, most of the referendum risk is already accounted for in the current level, he said.

The 9¼% Venezuelan government bonds due 2027 slipped 0.5 point to 51 bid, 51.5 offered.

Fellow high-beta Argentina slipped on the day's session.

The 8.28% Argentine discount bonds due 2033 dropped 0.875 point to 30.25 bid, 32 offered.

Also in Latin America, Brazil was mired in category-wide weakness as it took its own tumble.

The 7 1/8% Brazilian bonds due 2037 gave up 1.75 points to 97 bid, 99.5 offered.

Asia still ahead

Asia continued to hold its lead over the other categories on Thursday, a trader said.

Emerging Europe and Latin America have been stumbling over currency problems, but "we've been through a lot of this," he said about Asia.

South Korea may be an exception as an underperformer, but even Indonesia, with concerns of new supply, has held well.

Many Asian issues are "technically well supported" and trade at very light volumes, so the market has not been truly tested, the trader said.

"Things are illiquid and not wholly realistic," he said.

"New supply at this stage would definitely test the market," he said, but anyone with familiarity about the Indonesia deal was holding their cards close.

The Indonesian bonds due 2018 fell 1 point to 80 bid, 82 offered.

In the Philippines, the government's total outstanding debt increased by 12.9% in November, compared to November 2007, the Bureau of Treasury reported.

The increase put the total debt at PHP 4.24 trillion with PHP 1.83 trillion in foreign debt.

The Philippine government bonds due 2030 gave up 0.25 point to 114.5 bid, 115.5 offered.

In Pakistan, president Asif Ali Zardari made diplomatic inroads with U.S. president Barack Obama during a phone call, reports said.

Obama affirmed his support for Pakistan's fledgling democracy and emphasized the country's importance to regional stability.

Meanwhile, Pakistan admitted for the first time since the November terrorist attacks in Mumbai, India, that some of the banned Pakistani group Lashkar-e-Taiba are in custody and may be prosecuted.

The Pakistani government believes that some of the planning of the attack may have occurred within its borders.

The Pakistani bonds due 2017 traded at 40 bid, 45 offered.

Emerging Europe 'a mess'

Emerging Europe was "a mess" and "was a mess all day, really," a London-based trader said.

"It was weak and quiet and gathered pace and equities joined in," he said.

"Russia, just traded lower," he said, adding that there is a growing sense that Russia, along with Ukraine and Kazakhstan, are in worse condition than recently suspected.

There were no new revelations which weighed on the sentiment, he said.

"There's nothing specific or fresh ... The world's broken again," he said. "Obama had his day or two."

Meanwhile in Russia, prime minister Vladimir Putin filed amendments to the duma for the 2009 federal budget, reports said.

The major changes included 300 billion rubles in guarantees for defense contractors and 100 billion rubles for capital investment guarantees.

In Turkey, the country hopes to attract $20 billion in foreign investments in 2009, said trade minister Kursad Tuzmen, according to the Hurriyet Daily News.

The government used the figure, which is approximately half of the foreign investment inflow during 2007 and 2008. The expectation is also that the majority of that capital enters the country in the second half of 2009.

"We are working really hard to attract more foreign capital," said Tuzmen.

"Unemployment is one of the most important problems of Turkey. We attach a great importance to foreign investments as a solution of this problem," he added.

Elsewhere in Latvia, Turkey foreign minister Ali Babacan told reporters that "by the year 2013, Turkey will say it is ready, but we don't know if the E.U. will be ready for it," he said about accession to the European Union.

"Turkey three or four years from now will be different than it is now," he said.

The E.U. leadership has not accepted Turkey's target date of 2013.

"Turkey's been under quiet pressure all week," the trader said. "They just keep lurching lower."

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