Emerging markets steam ahead; Argentina, high-betas strengthen; spreads wrapped tighter again

By Aaron Hochman-Zimmerman

New York, Aug. 4 - Emerging markets continued unimpeded on their rally, leaving many elated and many feeling as though the market's good fortune was on borrowed time.

The buying continued despite equity weakness, and the rally seemed to have the will and momentum to make its own destiny.

"The market is not buying anything rationally," a trader said. "It's surpassed where I thought it would go."

"We continue to see buys of risk," he said. "It just never ends."

Perhaps, with payrolls at the end of the week, "we may see some profit-taking," he said.

Argentina's recent coupon payment on its Boden 12 bonds put even more of an incentive behind its range of bonds, and the benchmark discount bonds due 2033 added 3 points on Tuesday.

From the major markets, equities were mostly mixed, but volatility fell by 0.67 to close at 24.89, according to the VIX index. The index is a common measure of market volatility.

As a sector, emerging markets pulled in another 10 basis points to a spread of 354 bps, according to JPMorgan's EMBI+ index. The EMBI+ determines the amount of extra yield investors will demand to hold assets in emerging market debt.

Emerging Europe glides higher

Emerging Europe was along for the ride once again as "we've seen buyers of everything," a London-based trader said, as levels were up across the board and without any stand-out performers.

"It's the same situation we've seen over the past couple weeks," the trader said.

Levels drifted higher and spreads drifted tighter, he said.

On the primary side, a new offer of RUB 20 billion seven-year bonds is expected from the city of Moscow, but the interest will remain with the local-market traders, he said.

No global deals seemed imminent, but issuers may arrive at any moment, he said.

"Feed them while they're hungry," he said.

Also in Russia, the military was put on alert along Georgia's border after what was described by the Russian Foreign Ministry as "provocations."

The trader was following the story with some interest, but much like Russia's full-scale invasion one year ago, "it's had no effect on trading," he said.

The Russian government bonds due 2030 were better by ½ point to 101¾ bid, 101 7/8 offered.

OAO Gazprom's new 8 1/8% euro-denominated bonds due 2015 were up 0.15 point to 106 bid, 107 offered, while the 8 1/8% dollar-denominated bonds due 2014 were better by ¾ point to 102¾ bid, 103½ offered.

In Ukraine, Party of Regions leader Viktor Yanukovych and prime minister Yulia Tymoshenko held first and second place in a recent popularity poll of possible presidential candidates, the Kyiv Post reported.

The election is expected on Jan. 17, 2010, although if the vote were held immediately, Yanukovych would have been the top vote-getter, the survey showed.

Tymoshenko would have followed Yanukovych's 24%, with a 12.8% draw. Only 2.9% said they would vote for current president Viktor Yushchenko.

Elsewhere in emerging Europe, the KazMunaiGaz 11¾% bonds due 2015, which were retapped at 102 on July 28, were quoted at 105½ bid, 106 offered.

Turkey's retapped 7½% notes due 2017 were reopened at 105.18 on July 24 and were quoted at 108 bid, 108½ offered on Tuesday.

LatAm breaks range, still rising

The high-betas pushed Latin America to beyond the range that was broken on Monday, said Enrique Alvarez, a Latin America debt strategist at think tank IDEAglobal.

"High-beta continues to make headway," he said, but "the core credits are pressing."

"Argentina continues to move forward," he said.

Meanwhile in Argentina, the government's use of $2.25 billion of currency reserves to retire Boden 2012s will not have a great impact on the total reserve, said economy minister Amado Boudou, according to the Buenos Aires Herald.

Diverting the cash "will have a neutral impact on the central bank reserves," he said.

The amount used to pay down debt only recently arrived at the central bank as part of the government's stimulus plan.

"The central bank currently has $46 billion on its reserves which triplicate what the central bank used to have in 2003," Boudou said.

The important point is "they made the coupon payment," Alvarez said.

"It was in doubt at the beginning of the year," he said, but fulfilling the obligation "fortified the market."

The 8.28% Argentine discount bonds due 2033 launched up 3 points to 62 bid, 63¼ offered.

Even Brazil, "which had been stagnant, started moving to the upside," he said.

The 7 1/8% Brazilian government bonds due 2019 slipped 0.05 point to 103.55 bid, 104½ offered.

In Colombia, president Alvaro Uribe announced that he will visit with regional leaders to discuss the greater U.S. presence in Colombia.

Uribe will travel to Brazil, Chile, Paraguay, Peru as well as other possible stops to assuage fears that the new U.S. military installations will have a negative impact in the area.

The 7 3/8% Colombian bonds due 2019 took on 1 1/8 points to 109.7 bid, 110¾ offered.

Chavez needs java

In Venezuela, the government nationalized two major coffee producers in order to fully audit their books, reports said.

Government control is intended to last only three months, said agriculture minister Elias Jaua, while auditors will determine if any illegal trade practices have occurred.

The production costs of coffee and other certain foodstuffs are tightly regulated by the government.

Also "Venezuela has reacted positively to what's going on in crude oil," Alvarez said.

Light sweet crude was seen trading over $71 per barrel.

The 9¼% Venezuelan sovereigns due 2027 jumped 1 3/8 point to 73 5/8 bid, 74½ offered.

Local Asia improving

Asia spent another session tightening amid more positive data from the local markets.

In the Philippines, headline inflation fell to 3.2% in the second quarter from 6.9% in the first quarter and 9.7% in the second quarter of 2009, according to the central bank's quarterly inflation report.

The central bank credited its monetary policy for the success.

The bank cut rates by 50 bps in the second quarter to total a 175 bps cut since December 2008, the report said.

The government still maintains its inflation outlook of 3½% in 2009 and 4½% in 2010.

The peso was seen trading at 47.75 to the dollar.

In Indonesia, the government expects to see export growth of 5% in 2010 after suffering a 15% drop in 2009, the Jakarta Post reported.

"Our exports will increase by 5% next year. We're optimistic about that," trade minister Mari Elka Pengestu told the legislature.

The trade minister also said that the country may begin to see positive numbers in the closing months of 2009.

The rupiah was seen trading at 9,855 to the dollar.

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