Emerging markets drift without catalysts; some profits taken in light trading; spreads widen

By Aaron Hochman-Zimmerman

New York, June 12 - Emerging markets traded sluggishly and flat while equities rattled back and forth, providing no leadership.

"Yields have calmed on the Treasury side," but largely "today has sort of pre-summer type volumes," said Enrique Alvarez, a Latin America debt strategist at think tank IDEAglobal, on Friday.

Emerging markets need to "key off U.S. elements," he said.

Within the emerging markets "there is nothing domestic driving anything," he said, with the possible exception of Argentina, which improved on expectations of early coupon payments and renewed default negotiations.

The discount bonds due 2033 added 1½ points.

Issues have "chopped a lot, but really they've done nothing," a trader said, which "is just what the market needs."

The primary was quiet, but some are still watching for an expected issue from Lithuania via Citigroup, Credit Suisse and the RBS Securities as well as Banco Cruzeiro do Sul via BCP Securities.

The equity markets held an erratic session, but volatility only added 0.04 to close the day at 28.15, according to the VIX index. The index is an often used gauge of market volatility.

As a sector, emerging markets stretched wider by 4 basis points to a spread of 414 bps, according to JPMorgan's EMB+ index. The EMBI+ estimates the amount of extra yield investors will demand to hold assets in emerging market debt.

Emerging Europe inches higher

Emerging Europe stepped slightly higher during what was "a pretty dead day," a trader said, with "the Baltics stuck where they are."

"We're waiting for more news on the Latvia story," he said.

The FX market was thrown for a loop when on Thursday "there was a rumor that the prime minister has resigned," he said.

Prime minister Valdis Dombrovskis quickly issued the following statement: "The information disseminated to the mass media that the Latvian government headed by prime minister Valdis Dombrovskis is about to resign is false and deceptive - the prime minister stresses that the resignation has not happened and is not even considered."

In the Middle East, Saudi Arabia's "TAQA bonds have travelled a little bit south," the trader said, over the entire curve.

Also in the region, the new bonds from the Central Bank of Bahrain "performed extremely well," the trader said, as they traded up to 102 bid from par.

"The real reason behind it is that the locals are pushing it up and Europe and Asia are pushing it up," he said.

The United States, which "is usually selling and flipping ... was not involved," he said.

Meanwhile, the category benchmarks were lightly traded and hardly changed.

In Russia, the government bonds due 2030 added 3/8 point to 99 7/8 bid, while Turkey's sovereign bonds due 2030 added ¾ point to 152¼ bid.

LatAm 'a mixed bag'

Latin America was "a mixed bag" on Friday, said IDEAglobal's Alvarez.

"The core markets have drifted," he said, and "high-betas had been the leader," but Venezuela was lower on some profit-taking.

The 9¼% Venezuelan sovereigns due 2027 fell by 1 7/8 point to 70½ bid, 72 offered.

In Argentina, the bonds saw recent "new highs," Alvarez said, as the market expects early payments on the Boden 2012s and for the defaulted bondholders a "likely restart of negotiations."

The 8.28% Argentine discount bonds due 2033 added 1½ points to 50 bid, 51¼ offered.

In Brazil, the 7 1/8% government bonds due 2019 added just 1/8 point to 99.2 bid.

Ecuador finds more to buy

"The Ecuador 15s have been very, very firm," Alvarez said.

The 2015 bonds, which in terms of tenor are surrounded by defaulted issues due in 2012 and 2030, held at 68 bid and "haven't moved today," he said on Friday.

Beyond the 91% participation rate in the 35% settlement on the defaulted bonds, Quito has been "juicing the bonds" to make a case that they can be trusted enough to return to the market, he said.

Quiet Asia consolidates

"Spreads are little changed [on] little movement," a trader said.

"The markets are consolidative more that anything else," he said, but still "pretty well-supported."

There was "some profit taking that needs to be done," he said, but with "no major catalyst" the market waffled throughout the week.

The Korea Hydro & Nuclear Power Co. Ltd. bonds were seen in the 370 bps bid, 360 bps offered range and "seen in that context all day," he said after the deal priced on Wednesday at Treasuries plus 362.5 bps.

Meanwhile, some expected a new deal from Korea Housing Association, "but I don't think it's particularly imminent," he said.

Similarly to the rest of the emerging markets, the benchmarks were loath to move.

In the Philippines the government bonds due 2030 were quoted at 123 bid, 124 offered.

The Indonesia sovereigns due 2019 were seen at 125 bid, 126 offered.

In Pakistan, continued violence and terrorism has not impacted the credit levels.

The bonds due 2017 were spotted at 64 bid, 68 offered.

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