Emerging markets jump with equities; Ecuador offers default deal; Treasuries bring spreads in

By Aaron Hochman-Zimmerman

New York, May 26 - Emerging markets returned from holiday with a strong showing complete with tightening from ballooning Treasury yields.

The primary remained silent, but trading saw moderate volumes, and levels were aided by a renewed equity recovery.

Ecuador announced its willingness to pay 35 cents to the dollar for its defaulted bonds due 2012 and 2030 while the remaining bonds due 2015 tacked on 3 points.

Equity strength undercut volatility, which dropped by 2.01 to 30.62, according to the VIX index. The index is a common measure of market volatility.

Treasury yields marched higher as emerging markets wound tighter again by 7 basis points to a spread of 459 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.

Ecuador offers 35 cents

In Ecuador, the government announced that it would pay willing bondholders 35 cents to the dollar on $3.2 billion in defaulted debt due 2012 and 2030.

Many investors snapped at the government's offer, but some hold-outs may still decide to try for a higher amount in court.

The government's ability to retire nearly two-thirds of its debt is "a remarkable feat," said Enrique Alvarez, a Latin America debt strategist at think tank IDEAglobal.

After the news, the 9 3/8% Ecuadorean bonds due 2015 jumped.

The bonds have remained near 45 bid for some time as a settlement was expected from Quito.

The bonds due 2015 were seen higher by 3 points at 49 bid, 50 offered.

Still, "I doubt people are going to jump on the '15s," Alvarez said.

Their success could be attributed to lighter supply in the market, reallocation into risky assets or a push from Quito to raise values before a possible re-entrance into the market, he said.

LatAm wraps tighter

In the rest of Latin America, spreads reeled in as strong stocks and data combined with soaring U.S. Treasury yields to provide a calm air, which may prove to be the calm before the storm, Alvarez said.

The "runaway freight train" of Treasury yields may combine with a rally, which never consolidated to provide "a very difficult picture ahead for Latin America," he said.

Brazil is still believed to be interested in issuing new 10- or 30-year paper, but no progress was made on Tuesday.

The current landscape in U.S. Treasuries "is probably not the preferred scenario," he said for anyone interested in issuing, "unless it's getting worse."

The 7 1/8% Brazilian bonds due 2019 took on ¼ point 100.8 bid, 101½ offered.

Venezuela may similarly have a struggle ahead.

President Hugo Chavez is believed to have appealed to Brazil for help in addition to the income from the latest nationalizations, Alvarez said.

Oil also sank below $60 per barrel on Tuesday.

The 9¼% Venezuelan sovereign bonds due 2027 improved by 5/8 point to 62 3/8 bid, 63½ offered.

By contrast, Argentina has been the recipient of some new money and confidence.

The 8.28% Argentine discount bonds due 2033 added 2 points to 39¼ bid, 41 offered.

Emerging Europe climbs back

Emerging Europe began the week with modest flows and a heavy tone, which "turned around with stocks and the data," a trader said.

Still, there was "a lot of inquiry on a lot of stuff," the trader said.

In Russia, the GDP fell by 10½% in April compared to April 2008. The new number pushed the yearly GDP total 9.8% lower than through the first four months of 2008.

The Russian government bonds due 2030 slipped by 3/8 point to 100 bid, 100½ offered.

South Africa's economy shrank at the rate of 6.4% in the first quarter, classifying it as in recession.

Africa's largest economy contracted by 1.8% in the fourth quarter of 2008.

The new South African bonds due 2019 were seen at 100½ bid, 101 offered.

Also in emerging Europe, in Turkey, months of speculation about a bailout deal with the International Monetary Fund have not been for nothing, prime minister Recep Tayyip Erdogan said, according to the Hurriyet Daily News.

Erdogan spoke to a group of Turkish business leaders but gave no further detail about the proposed loan package.

The Turkish sovereign bonds due 2030 fell ½ point to 149 bid, 150 offered.

Meanwhile in the United Arab Emirates, the French military opened its first Persian Gulf installation in the emirate of Abu Dhabi.

The base will host a small permanent party of 500 personnel.

Asia firm on shaky political ground

Asia found its way tighter along with U.S. equity strength as investors returned to their desks on Tuesday.

North Korea's recent series of tests of nuclear weapons and missile delivery capability did not seem to seriously bother the credit market, a trader said, even in South Korea.

Asian equities suffered from the destabilizing moves, which brought international admonishment to North Korea along with threats of new sanctions.

In the Philippines, the central bank believes inflation will continue to ease into the third quarter, according to the Manila Times.

"It's positive for the third quarter," central bank governor Amando Tetangco said in the report, citing numbers from a recent economic survey.

"If you try to understand all of these indicators, what this suggests is that there is sustained economic activity," he added.

The year's inflation rate stood at 6.4% in April, down from 6.9% in March.

The peso was seen trading at 47.2 to the dollar.

In Indonesia, Sharia-compliant currency swaps were one of the subjects discussed at an Islamic financial conference Monday and Tuesday.

The swaps are necessary for Islamic finance to have a global presence and are likely legal under Sharia law, said Syafii Antonio, chief executive officer of the Tazkia Group, according to the Jakarta Post.

"Perhaps we can first introduce the foreign exchange swap. This is also important to secure liquidity among the Islamic banks," he said in the report.

In Pakistan, the supreme court reversed its ruling, which barred former prime minister Nawaz Sharif and his brother Shahbaz from seeking public office.

Many believe that the corruption charges against Sharif came from political opponents.

The popular brothers will be eligible to run for the presidency in 2013 or sooner in parliamentary contests.

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