Emerging markets flatten; Mubadala benchmark on tap 'this week'; Treasuries reel in spreads

By Aaron Hochman-Zimmerman

New York, April 28 - Emerging markets mostly stopped the swine flu-inspired skid, which dominated Monday's session.

Still, the flu and its fallout continued to dominate the headlines.

Many investors, however, preferred to think positively and focus on "a couple of good positive pills" instead, said Enrique Alvarez, a Latin America debt strategist at think tank IDEAglobal.

Consumer sentiment and the Case-Schiller home price index inspired a midday improvement in equities, which faded by the close.

Mexico, which has become the most visible of the emerging market countries, began to flatten out its downward trajectory. Its ability to hold off further losses helped the rest of the market backstop Monday's declines.

Mexico's bonds due 2014 added 0.6 point.

Tuesday also brought renewed activity in the primary market as Abu Dhabi's Mubadala Development Co. PJSC announced its five- and 10-year bonds would price this week.

Elsewhere, from the major markets, equities ended generally flat as volatility fell by 0.37 to close at 37.95, according to the VIX index. The index is a common measure of market volatility.

Ten-year Treasury yields topped 3%, which set off a tightening of 8 basis points to a spread of 552 bps in emerging markets, according to JPMorgan's EMBI+ index. The EMBI+ estimates the amount of extra yield investors will demand to hold assets in emerging market debt.

Primary avoids flu

The lights were turned on in the primary market again on Tuesday after a small hiatus.

Mubadala Development plans to issue a dollar-denominated benchmark-sized senior unsecured note offering with five- and 10-year maturities (Aa2/AA/AA).

Citigroup, Goldman Sachs and RBS Securities will act as bookrunners for the deal.

The company will conduct a net roadshow and price this week. The bonds will come from a global medium-term note program, Mubadala announced on April 20.

Proceeds will be used for general corporate purposes.

Mubadala Development is an Abu Dhabi-based holding company.

South Korea's Kookmin Bank mandated Citigroup and HSBC to conduct an investor roadshow for a potential bond offering (A2/A/A+).

The roadshow is scheduled to be held in Singapore and Los Angeles on April 29, in Hong Kong and Boston on April 30 and in London and New York on May 1.

The issue is a European-style asset-backed covered bond, a trader said.

"Korea in general has been so firm, I don't think it's going to have an impact," he said.

The Korean bonds due 2014 were seen tighter by 10 bps at 390 bps bid, 380 bps offered.

Asia 'pretty firm'

The rest of Asia was similarly able to shake off any of its flu symptoms.

"It's actually pretty firm," the trader said, as the sector was "shrugging off the bad news."

"Credit's been doing better but not to the extent that the equity market has anyway, so it's not as vulnerable to a pullback," he said.

In the Philippines, the bonds were weaker on expectations of more supply, the trader said.

Also, April inflation is expected as low as 4.5% to 5.4%, down from 6.4% in March, central bank governor Amando Tetangco said, according to the Manila Times.

"The lower April inflation forecast confirms our within-target inflation outlook for 2009 and 2010 and the flexibility that this provides to monetary policy," he said in the report.

The lower inflation may encourage the bank to reverse or halt recent interest rate cuts.

The peso was seen trading at 48.905 to the dollar.

The Philippine sovereign bonds due 2030 fell ¾ point to 119 bid, 120 offered.

Meanwhile in Indonesia, the bonds were trading "at all-time highs," he said.

Investors are very comfortable with the financial and political situations in Indonesia, he said, and the bonds are "a way to get more high-beta in your portfolio."

The government is likely to have finished its issuance for the year, but there has been talk of a yen deal, he said.

If Jakarta moves ahead with the samurai bond, after it is completed "the issuance is done," he said.

Also, state-owned firms will put $12.7 billion of capital to work, a 24% increase, in order to help stimulate the economy, the Jakarta Post reported.

The nation's economy is expected to post growth of 4% to 5% in 2009, down from 6.1% in 2008, the report said.

The Indonesian sukuk due 2014 was seen at 101½ bid, 102 offered.

Also in Asia, Pakistan ordered air strikes against Taliban fighters in the contested area around Buner, just 65 miles from Islamabad.

The Pakistani bonds due 2017 were quoted at 54 bid, 57 offered.

Considering the country's political instability, the bonds have held up "amazingly well," he said.

Mexico becoming 'stable'

"At least it's stable," said IDEAglobal's Alvarez about Mexico's credit during Tuesday's session.

"Yesterday it got trashed," he said as the world was still consumed with news about the swine flu.

They have known about the potential for this for months, Alvarez said, and "they didn't act on it ... it's still a third-world country."

The questions that remain are over how much damage the outbreak will do to Mexican tourism, services and agriculture, he said.

Beef exports are particularly sensitive, even more so than the smaller pork trade, he said.

The ramifications may even stretch into the United States, which has already been stamped with travel warnings from Europe.

An overly cautious response from regulators may lead to a battle of spiraling "protectionism," he said.

The 5 7/8% Mexican bonds due 2014 added 0.6 point to 103.6 bid, 104½ offered.

LatAm mixed on flu fallout

Meanwhile in the rest of Latin America, considering the external environment, "Colombia is awfully firm," Alvarez said.

The success could be attributed to an allocation shift because "Mexico is on the tilt," he said.

The 8 1/8% Colombian bonds due 2024 improved 1¼ point to 108¾ bid, 109.85 offered.

Elsewhere in the category, many credits enjoyed a bit of residual success from two weeks worth of positive inflows into the sector.

Still, most are sitting back in a "wait and see" stance, he said; there are too many potential dark clouds to be bullish.

Brazil's 5 7/8% Brazilian bonds due 2019 added 0.55 point to 97.15 bid, 99 offered, while Venezuela's 9¼% sovereigns due 2027 slipped ½ point to 63 bid, 64¼ offered.

Emerging Europe finishes mixed

Emerging Europe traded largely mixed as some spreads were able to wind tighter on Treasury action.

In Russia, the government has set before itself a policy of reducing inflation to 8% by 2012, prime minister Vladimir Putin said, according to the Itar-Tass News Agency.

"The budget should not provoke inflation, and our task is to bring inflation down to 8% in three years remains on the agenda," Putin said in the report.

Meanwhile, as the Russian economy suffers in the near term, a round of layoffs are expected, but not from the private sector.

Reports also indicated that over 35,000 military officers will be released before the end of 2009.

"We are not going to keep officers who are not fit for their positions," general Nikolai Pankov said at a news conference where reporters learned that nearly 20% of officers and non-commissioned officers failed an aptitude test, the RIA Novosti News Service reported.

In Turkey, economy minister Mehmet Simsek said he expects to see an economic turnaround for his country in 2010.

"My estimation is that Turkey would resume positive economic growth by 2010, but that would also hinge on the outlook of the global economy and on the prospects of its normalization," he said at a New York financial conference, the Hurriyet Daily News reported.

Also in emerging Europe, Lithuania's troubled economy shrank by 12.6% in the first quarter, compared to the first quarter of 2008.

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