Emerging markets hold; market digests new Mexico paper; Indonesia announces benchmark offering

By Aaron Hochman-Zimmerman

New York, Feb. 13 - Emerging markets hardly traded on Friday's shortened session.

Investors took the opportunity to examine the upcoming new issues after Mexico's half-baked issue on Wednesday.

Mexico's five-year bonds, which priced, were digested with little trouble, but investors were discouraged by the reluctance of accounts to put cash into the proposed 21-year long bond in an offering that Mexico later pulled.

Meanwhile, Indonesia and its bookrunners, who had long remained silent about Indonesia's debt offering, finally offered some news on Friday.

There will be a dollar-denominated benchmark offering, said a note from Barclays and UBS.

Only further rumors and no further details about timing followed the brief announcement, but any thoughts that the deal had been temporarily shelved or pulled entirely were quieted.

Elsewhere, emerging Europe continued to deteriorate under currency concerns.

Accounts are very overweight in Turkey as well as Brazil and the Philippines, a strategist said.

"How can you argue for ongoing upside?" he asked.

Everything else would have to rally to allow more room for growth, he said.

Meanwhile in the major markets, volatility, in keeping with its name, whipped wildly on Friday to close higher by 1.68 at 42.93, according to the VIX index. The index is an often used measure of market volatility.

Also, Treasury yields tightened as emerging market spreads narrowed by 10 basis points to a spread of 661 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.

'Ongoing fears' in emerging Europe

Emerging European trading was painfully slow on Friday.

"I'm struggling to stay awake," a trader said, but while some were ready to sleep others were worried about the monsters under the bed.

"There's the ongoing fears with Russia," a strategist said, as the Russian bonds due 2030 were seen at 90.5 bid, 91 offered.

"Kazakhstan is a possible default candidate," he said.

In Kazakhstan, the government now requires pension fund portfolios to hold 30% in government debt, he said, up from 20%.

Much like Argentina's dipping into its pension funds as a source of revenue, Kazakhstan is now in a similar position, "struggling for funding," he said.

Meanwhile, Ukraine continues to be plagued with downgrades, he said.

Also in Turkey, talks between the government and the International Monetary Fund continued, but the IMF will not let Turkey use its funds for stimulus, the strategist said.

When the IMF loans money its purpose is to shore up balance sheets, he said.

Ankara objects to the rules the IMF has set as well as the oversight body which would monitor them, the Hurriyet Daily News reported.

Turkey is also "very sensitive" to shocks from the rest of Europe, the strategist said.

Czech please: €1 billion

Elsewhere in the Central European 4, the Czech Republic is expected bring its €1 billion deal during the Feb. 16 week, a trader said.

Barclays Capital, Ceska Sporitelna and Deutsche Bank will act as bookrunners.

"They're OK," a strategist said about the Czech Republic. "That will go over very, very well."

"Slovakia looks pretty good" as well, he said, but many of the other emerging European countries are plagued with problems.

Hungary and the Baltic States are in debt to the IMF, and Romania has "net negative foreign assets in its banks," he said.

LatAm feeling 'shaky'

Latin America traded quietly on Friday with "a two-way flow," a buysider said, which may have come as a welcome respite to many who watched a difficult, but relatively strong week go by.

Along with external toxicity, Mexico's withdrawal of the 21-year bond offering left the market feeling "shaky," the buysider said.

The new 5 7/8% Mexican five-year bonds traded at 99.7 bid, 100 offered after pricing at 99.424 on Wednesday.

In Venezuela, investors looked ahead to Sunday when citizens will head to the polls to decide whether or not president Hugo Chavez should be allowed to extend his term limits.

A victory for Chavez will likely be seen as a negative for the credit, but most of the downside has already been accounted for, the buysider said.

Also in Argentina, farmers decided to put off their planned protests of new export taxes, according to the Buenos Aires Herald.

Moments before their announcement, president Cristina Kirchner said that her "blood boils" at the sight of their greed, the report said.

Part of the postponement was in order to allow the government to focus on the recovery from the mudslide which killed two and left hundreds homeless in Tartagal, Salta province.

"In the face of that horror, and calling social organizations to help those people, we are postponing any action whatsoever," farm leader Eduardo Buzzi said.

Elsewhere, Brazil's 11% bonds due 2040 were seen trading at 122.5 bid, 123 offered.

Sturdy Asia gets Indo news

At long last official word came from Barclays and UBS, the arrangers of Indonesia's medium-term note program roadshow, that a dollar-denominated benchmark issue will be on the way.

"Subject to market conditions, the Republic of Indonesia will set up a benchmark-sized [dollar] bond issue under the GMTN program upon the completion of the investor update and the parliamentary budget process," the statement said.

The note did not provide any particulars, but the issue will have to wait "until they pass the budget, so it might be a while," a buysider said.

The Indonesian government bonds due 2018 were unchanged at 80 bid, 83 offered.

In the Philippines, the central bank announced that inflation continued to ease in the fourth quarter.

"Headline inflation, which started going down in September, continued to drop during [the fourth quarter] with the weakening of global economic activity and as supply conditions in both domestic and international markets improved," a bank statement said.

Low projections for oil prices will likely help put the inflation of the peso into the target ranges for 2009 and 2010, the statement said.

The peso was seen trading at 47.13 to the dollar.

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