Emerging credit markets strengthen again; LatAm finds half-rally; new bond offerings more likely

By Aaron Hochman-Zimmerman

New York, March 13 - Emerging markets followed through with the week's rally as levels closed higher on Friday.

Prices and spreads improved, but the week's market performance seemed to do more for sentiment than actual value.

There was "a nice little short squeeze for a while, now maybe it will rally until the end of April," a strategist said, basing the prediction on historical rally cycles.

In the larger sense, "maybe there's hope the bottom has been found," he said.

Still, the real test will be first-quarter earnings season, he said.

"Then we'll be able to gauge whether or not it's true," he said.

At least where the primary market is concerned, "it does seem as if the deal list has grown," he said.

In trading, Russia and Turkey seemed resurgent on Friday. Both added 2 points to their benchmark bonds due 2030.

From the major markets, volatility still managed to climb by 1.18 to 42.36, according to the VIX index. The index is a frequently used yardstick of market volatility.

As a sector, emerging markets tightened by 12 basis points to a spread of 696 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 wider by 13 bps with a spread of 696 bps.

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

Russia, Turkey strong

Emerging Europe kept its rally sneakers on as it ran through Friday to the close of the session.

"The market needed me back to rally," said a trader, who returned from holiday to a much improved situation at the trading desk.

"Generally there were better buyers of cash from the U.S.," he said. European accounts were "mixed" in what remained a "very edgy" market.

"Volatility remains very high," he said, even as spreads were pulling in.

"Poland is considerably tighter," he said. Hungary and Romania were also improved.

In the Baltics, severely damaged currencies continued to take a toll, particularly in Lativa, he said.

Lithuania is in a similar situation but was "doing OK" on Friday as its five-year CDS spread crept tighter.

Farther south, Bulgaria underperformed for similar reasons, he said.

In Russia, the central bank indicated that is may cut its discount rate on early signs of easing inflation, bank president Sergei Ignatiev said, according to the Itar-Tass News Agency.

"In principle, we shall be prepared to lower CBR interest rates on the condition there are signs inflation is reducing. But that is very unlikely before that. I will not say an emphatic no, but it is very improbable," Ignatiev said.

The Russian bonds due 2030 jumped 2 points to 93.25 bid, 93.75 offered.

"Russia has made a huge rebound," a strategist said.

The five-year CDS was seen trading near 650 bps bid, from a wide of near 800 bps, he said.

In Turkey, prime minister Recep Tayyip Erdogan said a new round of proposals from the International Monetary Fund were not received.

The two sides have been working through a new deal that would allow Ankara access to IMF funds. Talks have been delayed over the IMF's insistence that the money be used for specific purposes.

Reports have noted recent progress in the discussions, but many feel no deal will be finalized until after Turkey's local elections on March 29.

The Turkish sovereigns due 2030 were unchanged at 127 bid, 129 offered.

LatAm's half-hearted half rally

Latin America finished off "a very stable week" on Friday, said Enrique Alvarez, a Latin America debt strategist at think tank IDEAglobal.

"There's not a whole lot going on," he said.

Latin America lagged the other sectors as evidenced by JPMorgan's EMBI+ index.

While the whole index improved by 2.2% during the rally week, Latin America was only better by half of that number, 1.1%, Alvarez noted.

The figure shows "a lack of trust or a lack of interest" in the sector, he said; "take your pick."

Throughout the week, "Argentina was gaining a little" on a "bounce because it had been off strongly," he said, but the bonds finally fell on Friday.

The 8.28% Argentine discount bonds due 2033 dropped 0.625 point to 27 bid, 28.2 offered.

In Venezuela, the bonds "came back a little," Alvarez said, as the legislature transferred control of the country's transportation infrastructure to president Hugo Chavez and away from state supervision.

The federal government cited "strategic reasons" for its need to assume centralized control of highways, sea and airports.

The 9¼% Venezuelan government bonds due 2027 improved by 0.75 point to 56.625 bid, 57.25 offered.

Generally in the category, "the action has been in the currencies," Alvarez said.

Mexico's peso and the real have struggled, but they bounced back on Friday on the stronger sentiment.

Meanwhile Brazil's 5 7/8% bonds due 2019 also added 0.75 point to 94.5 bid, 95.5 offered.

Asia slow ahead of new offers

Asia held quietly on Friday as the usual emerging market outperformer waited to see how some of its corporate issuers would fare.

South Korea's Posco will hold a roadshow for a dollar-denominated offering from Monday through Wednesday, and Indonesia's Bank Rakyat Indonesia is rumored to be in the market with a $300 million offering of its own.

In Indonesia, bank lending has dropped in recent months, according to central bank data, the Jakarta Post reported.

In January, outstanding loans hit a four-month low and totaled 1,289.84 trillion rupiah compared to 1,307.69 trillion rupiah in December.

The Indonesian bonds due 2019 tacked on 0.5 point to 102 bid, 103.5 offered.

In China, premier Wen Jiabao expressed his concern over the condition of U.S. Treasury bonds but said that China would do what is necessary to stimulate its own economy.

Many held the belief that after China's 4 trillion yuan stimulus package, the country would be out of options.

Wen said China is prepared to take appropriate actions to augment the original stimulus.

Also the Philippines' sovereigns due 2030 were unchanged at 114 bid, 115.75 offered.

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