Emerging markets head lower; Indonesia's $3 billion bonds well-received; market waits for Cemex

By Aaron Hochman-Zimmerman

New York, Feb. 27 - Emerging markets dug lower again on Friday, but spreads managed to tighten on supply driven selling of U.S. Treasuries.

"It doesn't look too good with equities down-trading," a strategist said.

Still, Indonesia's $3 billion worth of five- and 10-year bonds were digested easily and traded better, but most issues saw lower cash prices as traders left for the weekend.

Argentina was also an exception as rumors of International Monetary Fund involvement in the country pushed buyers to buoy the discount bonds due 2033 by 1.5 points.

With the Indonesia deal in the books, investors looked ahead to the deal from Mexico's Cemex SAB de CV.

The benchmark dollar deal will be a "trendsetter" for the category and the first true corporate issue in some time, a syndicate official said earlier in the week.

As Cemex is set to become a yardstick for Latin American corporates, "there is a sea of potential negatives to come out there," said Enrique Alvarez, a Latin America debt strategist at think tank IDEAglobal.

Some is attributable to the United States and major market troubles and some is internal to the category, he said.

Numbers for inflation, deficits and poor balance sheets are cropping up with increasing frequency and may damage the countries in question "at a magnitude beyond what the market is expecting," he said.

Also, during the week ended Wednesday, "higher risk aversion was evident in the flow data for emerging markets bond funds," according to a news release from EPFR Global.

Those investing primarily in local currency debt, which was an investor favorite during the first half of 2008, accounted for nearly 80% of total outflows, the release said.

Meanwhile during the session, volatility dropped midday but crept back to finish higher by 1.69 at 46.35, according to the VIX index. The index is a frequently used gauge of market volatility.

The 10-year Treasury yield widened past 304 basis points as emerging markets collectively tightened by 9 bps to a spread of 637 bps, according to JPMorgan's EMBI+ index. The EMBI+ calculates the amount of extra yield investors will accept to hold assets in emerging market debt.

Indonesia well-received, Asia calm

Indonesia's new issues of 10 3/8% five-year bonds and 11 5/8% 10-year bonds were well-received, a strategist said.

"It's amazing that Indonesia was able to come to the market oversubscribed," with an issue of that size under the current market conditions, a strategist said.

"That leaves you to believe that there is cash out there," he said, even though it was cheap to the curve at yields of 10½% and 11¾%, respectively.

"So, that's a positive," he said.

The bonds priced at 99.455 and 99.276, respectively and both traded at 100 bid, 100.5 offered.

Meanwhile in the Philippines, bonds were unchanged at 114 bid, 115 offered.

Also in Thailand, regional leaders signed a series of new trade agreements that may boost Asean member-nation economies by $48 billion by 2020, the BBC reported.

The new free-trade deals will not likely have a near-term impact, the report said.

Brunei, Burma, Cambodia, Indonesia, Laos, Malaysia, the Philippines, Singapore, Thailand and Vietnam are all members of Asean, which signed the accords with Australia and New Zealand.

Similar arrangements already exist between Asean and China, Japan and South Korea.

LatAm feels pressure

Latin America had "a sliver of pressure on it," IDEAglobal's Alvarez said.

Some internal weakness was compounded by the high volume coming into the Treasury market, he said.

Still, the day was relatively quiet as "the market is not reacting in an overly large amount to this," he said.

In Argentina, teachers in Buenos Aires were ready to join farmers on the picket lines on Monday as wage negotiations with the government were faltering on Friday.

The teachers demanded that the city and provincial governments deliver the 15.5% increase the national government agreed to in previous discussions.

However, the province and city claimed they could only muster an 11.2% increase, the Buenos Aires Herald reported.

The 8.28% Argentine discount bonds due 2033 added 1.5 points to 29.35 bid, 30 offered as rumors circulated that "Argentina may be forced back into the arms of the IMF," Alvarez said.

As oil prices traded just under $45 per barrel, Venezuela's 9¼% government bonds due 2027 slipped 0.25 point to 54.5 bid, 55.5 offered.

Also in Brazil, the 5 7/8% Brazilian bonds due 2019 also shed 0.25 point to 95 bid, 95.75 offered.

On the primary side, investors continued to wait for more details about the dollar benchmark from Mexico's Cemex.

The Indonesia deal may have been encouraging for some investors; however, the corporate market is less tested.

"Mexico is under a lot of pressure," Alvarez said.

Emerging Europe looks for loans

Traders of emerging European paper were busy Friday trying to complete deals as news of development lender money hitting the sector seemed a reality.

In Turkey, talks with the IMF were still underway late on Thursday, reports said.

"The mission and the authorities made significant progress in a number of key areas," said Rachel van Elkan, head of the IMF mission to Turkey, in a statement.

"In the coming weeks, the IMF team and the authorities will continue their dialogue with a view to finalizing the remaining issues pertaining, in particular, to the medium-term structural fiscal reform agenda," the statement continued.

Government officials have insisted that they will only accept an IMF loan if they are not constrained by the IMF's terms.

The Turkish sovereign bonds due 2030 sank again by 2 points to 126 bid, 126.5 offered.

Emerging European investors worried about currencies and balance sheets in many eastern European countries found on Friday that Hungary prime minister Ferenc Gyurcsany formulated a plan to ask the European Union for $230 billion for Hungary and its neighbors.

The plan coordinates loans from the European Bank for Reconstruction and Development, the European Investment Bank and the World Bank Group.

"The joint efforts under this initiative will assist individual financial institutions and sectors, while IMF lending will continue to support countries at the macroeconomic level. Both aspects are important building blocks in the broader multilateral and bilateral efforts to support the region," said Dominique Strauss-Kahn, IMF managing director.

Also in emerging Europe, Russia's government bonds gave back 0.5 point to 88 bid, 88.5 offered.

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