Emerging markets retrace early gains; recent new issues rally; spreads wider with Treasuries

By Aaron Hochman-Zimmerman

New York, Aug. 13 - Emerging markets began the day on an upward drive, but credits followed equities lower in the afternoon to pare the day's winnings.

"It's a more active August than we've had," a trader said, although on Thursday "it was extremely quiet," he said, "with pockets of inquiry."

Generally, the trader said the prevailing mood is to "buy the dip," he said.

The Philippines gathered the biggest gains of the major sovereigns as investors seeking yields added 2¼ points to its bonds due 2030.

Also in Asia, Hong Kong's Swire Pacific Ltd. led the new issues higher by tightening 13 basis points since pricing on Wednesday.

From the major markets, equity success shrank volatility by 0.74 to 24.71, according to the VIX index. The index is a common measure of market volatility.

As a sector, emerging markets drifted wider by 11 bps to a spread of 369 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.

Emerging Europe cedes gains

Emerging Europe began the day "better bid across the board on everything," a London-based trader said, who added "we were following equities."

"Equities were up, govie bonds were lower," he said, but in London's afternoon U.S. retail numbers hamstrung the rally and "reversed it a little bit."

"Now it's flat," he said, with "a little bit of spread widening."

No particular credits stood out above the crowd, he said, amid the action in Central and Eastern Europe; "the Middle East was very quiet."

"Most of the activity is the usual suspects," he said about the benchmark credits in Russia and Turkey.

The Russian sovereign bonds due 2030 added 0.3 point to 100.45 bid, 100.55 offered, while the Turkish bonds due 2030 slipped just 1/8 point to 154 3/8 bid, 154 7/8 offered.

Also in the category, Ukraine president Viktor Yushchenko fired back at Moscow after the Kremlin accused him of steering the Ukrainian people away from Russia for political gain.

"Our country has repeatedly confirmed its reliability as a partner in the transit of energy resources: gas, crude and atomic energy fuel," Yushchenko said in an address intended for president Dmitry Medvedev, according to the Kyiv Post.

Ukraine had made overtures to the West, including its desire to join NATO, but "Ukraine adheres to pragmatic economic relations with Russia, primarily in energy," Yushchenko said.

The infrequently traded Ukrainian bonds due 2016 were seen at 78½ bid, 81 offered.

The high levels the Ukrainian bond support are due to a combination of faith in the IMF to "backstop" the economy as well as an investor preference for high-yield paper, the trader said.

Meanwhile, in the Middle East, Abu Dhabi's Dolphin Energy Ltd., which priced a $1.25 billion 5.888% bonds at par on July 23, saw its bonds trading at 99½ bid, 100 offered Thursday.

New LatAm deals improve

Latin America traded well on Thursday as the new deals in the category performed well.

Petroleum Co. of Trinidad and Tobago, which priced an $850 million 9¾% bond due 2019 at 99.217 on Tuesday, saw the bonds close better by nearly 4½ points at 103¾ bid, 104 offered.

Meanwhile, Mexico's Grupo Petrotemex SA de CV, which priced a $200 million 9½% bond due 2014 at 99.029 on Wednesday, saw its bonds improve by only 0.2 point to 98½ bid, 99 offered.

On the sovereign side, Argentina's 8.28% discount bonds due 2033 added 1½ points to 62 bid, 63 offered.

Asia 'tracking' equities

Asia improved on Thursday, but the category was "more or less tracking the overall equity market," a trader said.

"The overnight market was very strong," he said, in both Asia and Europe, which allowed for a 6 bps to 10 bps tightening; however, a disappointing show from U.S. retail figures fed into a 3 bps to 4 bps retracement.

The new bonds from the "very Asia-centric" name, Swire Pacific, were nearly 19 bps tighter during the session.

However, the bonds closed 13 bps tighter at 177 bps bid, 174 bps offered and at a cash price of 101.15 bid.

"It's still going very well," a buysider said.

In the usual Asian names, "the tone seems pretty constructive" with "very strong bids on the cash side," the trader said.

Sovereigns jump in Asia

In the Philippines, foreign portfolio investment through the end of July reached $265 million of inflows, compared to $557 of outflows during the same period of 2008, the central bank said in a statement.

Gross investments hit $3.6 billion, with capital from the United States, United Kingdom, Japan and Singapore leading the way.

The bank also said that local consumer confidence indicates that the public feels the recession has hit bottom and the economy is in a recovery period.

The Philippine government bonds due 2030 improved by nearly 2¼ points to 128 at the bid and offer mid-point.

Indonesia also saw strong buyers for the bonds due 2019 which added ¾ point to 128 at the bid and offer mid-point.

South Korea's bonds due 2014 were unchanged at 200 bps.

Also in Asia, India signed agreements to break down tariffs with the 10 members of the Association of Southeast Asian Nations.

Taxes on electronics, industrial materials and textiles will be reduced and phased out, reports said.

Certain products, such as coffee, rubber and software, will retain much of their protection.

The 10 Asean members which signed the deal include Brunei, Burma, Cambodia, Indonesia, Laos, Malaysia, the Philippines, Singapore, Thailand and Vietnam.

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