Emerging markets at rally pace, lifted by optimism; Argentina's bonds jump; spreads steady

By Aaron Hochman-Zimmerman

New York, May 5 - Emerging markets were unfazed Tuesday by the softer equities and performed well amid some slight profit taking.

By Tuesday's session, the flu story had largely subsided and news of the Treasury Department's stress tests continued to be watered down by continuous leaks and fading interest.

"Maybe, Friday there will be something we can react to," a trader said.

Still, the market was able to run its engine on optimism, but there are those who may decide to "sit out and not believe in this rally for a month or two," the trader said.

The new perspective the rally offered to the market has added another tinge of complexity to the business, he said.

"There's more ways to make a mistake now," he said. "Both sides of the trade are open."

During Tuesday's trading, Argentina was only able to move in one direction as the discount bonds due 2033 added 3 points.

Equities fell slightly in the major market trading, but volatility was pushed lower by 1.17 to close the day at 33.36, according to the VIX index. The index is a common measure of market volatility.

As a sector, emerging markets tightened by just 1 basis point to a spread of 500 bps, according to JPMorgan's EMBI+ index. The EMBI+ calculates the amount of extra yield investors will demand to hold assets in emerging market debt.

Soaring Asia 'consolidating'

"We're consolidating more than anything today," a trader said about Asia, which has seen "some serious tightening in the last two days."

Since Tuesday of last week, South Korea's five-year CDS is 80 bps tighter and China is 40 bps tighter, he said.

The rally was evident on the cash side as Indonesia's bonds due 2019 have added almost 30 points since pricing at 99.276 to yield 11¾% on Feb. 26.

The bonds were seen at 127 bid, 128 offered.

On the corporate side, the bonds issued by Korea Development Bank, Posco and the Export-Import Bank of Korea "are all over 300 bps tighter," he said.

Meanwhile, South Korea's Kookmin Bank is still expected to bring an offer of asset-backed covered bonds at a spread near mid-swaps plus 550 bps, the trader said.

"The market has got some real strength to it," he said, and "in lots of different sectors."

The Korean won as well as the local stock markets have all performed well.

In the Philippines, inflation fell to 4.8% in April, down from 6.4% in March, according to a statement from the central bank. The new numbers brings the average figure down to 6.4% from 6.9%.

The peso was seen trading at 47.825 to the dollar.

The Philippine sovereign bonds due 2030 were seen at 112 bid, 113 offered.

Also in Pakistan, residents abandoned their homes in the Swat Valley as the presence of Taliban fighters created the potential for a showdown with the Pakistani army.

The Pakistani bonds due 2017 were quoted at 55 bid, 58 offered.

Argentina leads LatAm up

Latin America was up on help from equities, but the big move came from Argentina and was more difficult to explain.

"You have firmness in Argentina," but "I can't be too certain of what's going on," said Enrique Alvarez, a Latin America debt strategist at think tank IDEAglobal.

As a best guess, it is "dollar bond accumulation," he said, and is likely "linked to the holdouts" from the restructuring terms.

The 8.28% Argentine discount bonds due 2033 launched up 3 points to 33¼ bid, 34 offered.

Venezuela remained strong as its 9¼% government bonds due 2027 added 5/8 point to 66¼ bid, 66 7/8 offered.

Meanwhile in Mexico, the country finished its last day of a government-imposed work slow-down.

Still, the country is expected to debut a post-flu stimulus package to bring tourists back to Mexico, including tax breaks for cruise lines, Alvarez said.

The 5.95% Mexican bonds due 2019 were better by 1 point at 101.2 bid, 102 offered.

Also, the Brazil's 7 1/8% sovereigns due 2019 added 0.8 point to 100.2 bid, 100.55 offered.

Latin America was "very firm overall," Alvarez added.

Emerging Europe credits 'all better'

Emerging Europe rallied on a strong trading pace on Tuesday.

Not even Turkey stood out with its record low inflation rate, a trader said.

"It's everywhere, really," he said. "It's all better."

Turkish inflation hit a 40-year low at 6.13%, reports said, as the bonds and currency soared.

The government's statistics reporting agency hopes that inflation will hit 6% by the end of 2009.

The strong number convinced many in the market that a rate cut is forthcoming from the central bank, where rates are currently 9¾% for overnight borrowing and 12¼% for overnight lending.

Many in the market are still waiting for new developments from the government's ongoing talks with the International Monetary Fund.

The lira was seen trading at 1.5622 to the dollar.

The Turkish sovereign bonds due 2030 were seen at 148 bid, 149 offered.

Also in the category, Russia's government bonds due 2030 were seen at 98 5/8 bid, 98¾ offered, while the Ukraine bonds due 2016 were quoted at 62½ bid, 63½ offered.

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