Emerging markets end week mixed; Ecuador's bonds still strong; Treasuries slice spreads again

By Aaron Hochman-Zimmerman

New York, June 5 - Emerging markets finished a week of low volumes with a similar calm at the trading desks.

Still, investors had more cause for concern over spiking Treasury yields as the markets' moves and moods have lately been heavily Treasury related.

Ecuador's bonds held on to their high levels even as questions remained over the wisdom of buying bonds, which are bracketed in the curve by defaulted issues.

The bonds due 2015 added 1 point to 64½ bid.

Meanwhile, the relatively active primary took an early weekend, leaving over pending issues from Central Bank of Bahrain, Korea Hydro & Nuclear Power Co. Ltd. and Brazil's Banco Cruzeiro do Sul.

From the major markets, volatility was able to burrow below 30.00 again as it fell by 0.56 to end at 29.62, according to the VIX index. The index is an often used gauge of market volatility.

Treasuries moved higher still as emerging markets tightened by 11 basis points to a spread of 418 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.

Emerging Europe ends mixed

Emerging Europe was hectic on Friday as trading desks were busy with a high number of small orders, a strategist said.

Russian Agricultural Bank's new $1 billion issue of 9% bonds was absorbed well, he said.

The bonds due 2014 were seen as high as 102 bid.

Also in Russia, president Dmitry Medvedev said that Moscow will likely become more involved in the Russian economy as businesses will require more assistance going forward, the BBC reported.

"The advent of state ownership and its more intensive use in most sectors of the economy should be considered, probably, as an inevitable, but short-term, solution to the problem," he said, according to the report.

Meanwhile, Ukraine president Viktor Yushchenko instructed NJSC Naftogaz Ukrainy and the central bank to create a plan to pay for the next three months of gas shipments from Russia.

Russia has recently increased pressure on Ukraine, including threats to demand prepayment for fuel.

Also in Ukraine, prime minister Yulia Timoshenko was not able to conclude an agreement to form a coalition with the pro-Russia faction, Viktor Yanukovich's Party of Regions.

Yushchenko has considered a Timoshenko-Yanukovich alliance a step toward a "constitutional coup" and has called on the European Union and democracies of the world for support.

"As the president I will not allow next presidential election to happen in the parliament. The next presidential election will be direct and all-national. This is my duty as the citizen of Ukraine and as the president," he said, according to his official web site.

The Russian bonds due 2030 were off by just 0.15 point to 99.6 bid, 99¾ offered, while the Ukrainian bonds due 2016 were seen at 68 bid, 70 offered.

Also in the category, Turkey's sovereign bonds due 2030 were quoted lower by ¼ point at 150 bid, 151 offered.

High-betas better in LatAm

Latin America traded mixed on Friday with the balance favoring the high-betas.

In Venezuela, "they're caught between positives and negatives," said Enrique Alvarez, a Latin America debt strategist at think tank IDEAglobal, as the bonds fought to a draw.

There are lingering concerns over more nationalizations in the energy, industrial and media sectors offsetting any gains that $70 per barrel oil could deliver, he said.

The 9¼% Venezuelan government bonds due 2027 added ½ point to 66½ bid, 67 5/8 offered.

Elsewhere in Argentina, president Cristina Kirchner announced that the government will put $400 million of aid into local General Motors subsidiaries, according to the Buenos Aires Herald.

"They're doing what they can," Alvarez said, which is "not much."

The 8.28% Argentine discount bonds due 2033 were better by ½ point to 45 bid, 46½ offered.

Meanwhile, the high-betas are dominating the sector and "Brazil has lost its leadership role," he said.

Bonds were "an inch lower" as they corrected for U.S. interest rates, he said.

The 7 1/8% Brazilian bonds due 2019 fell by 1 point to 99.2 bid, 100 1/8 offered.

'Curious' Ecuador up again

"Ecuador is a curious case," said IDEAglobal's Alvarez.

After the government defaulted on its bonds due 2012 and 2030, the remaining 9 3/8% bonds due 2015 have shot up to 64 bid from 45 bid, Alvarez said.

"There's nothing impeding them from doing the same thing," he said.

Still, either investors are on for a quick ride upward or there is "something going on behind the scenes" to drive up prices in order to allow Quito new access to the primary market, he said.

However, "if things turn grim again, [president Rafael Correa] is going to turn around and pull the plug on this one too," he said.

The Ecuadorian bonds due 2015 were up 1 point 64½ bid; "that's really crazy," Alvarez said.

Quiet Asia narrows

Asia traded lightly but had help tightening from U.S. Treasuries.

The Asian Development Bank announced that it would extend a $1 billion loan to Indonesia "that will help the country sustain critical public expenditures for poverty alleviation, social protection and infrastructure maintenance in the wake of the global financial crisis," according to a press release.

The loan came after the bank determined that "the global financial crisis has made it expensive for Indonesia to access international debt markets ...," said Jaseem Ahmed, director of ADB's financial sector, public management and trade division for Southeast Asia department.

Jakarta has a total of $5.5 billion available to it through 2010 under a loan program established by the ADB as well as Australia, Japan and the World Bank.

Also in the Philippines, inflation fell to 3.3% in May, down from 4.8% in April, according to the central bank.

The year-to-date average fell to 5.7% from 6.4% with the new numbers.

The development offers the central bank breathing room to use monetary policy to guide the economic recovery programs, the bank's statement said.

The peso was seen trading at 47.375 to the dollar.

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