Emerging markets higher amid reduced trading volume; spreads wrap tighter; Argentina gains

By Aaron Hochman-Zimmerman

New York, Aug. 21 - Emerging markets saw major tightening on Treasury action while prices improved with big equity gains in the United States.

The primary was off to an early weekend while trading was "very thin; it was Friday and people left early anyway," a buysider said.

In what trading could be found, Argentina tacked 2½ points onto its discount bonds due 2033 as investors were encouraged by the prospect of a debt swap for $2.3 billion of the country's inflation-linked paper.

The week ahead looked to be equally silent; "they promised," said a buysider growing weary of the unusually busy August.

The recently calming market still continued to take on new money.

"Emerging markets bond funds extended their inflow streaks to 19 consecutive weeks," EPFR Global said in a statement.

From the major markets, a powerful day for equities shaved down volatility by just 0.08 to close at 25.01, according to the VIX index. The index is an often used gauge of market volatility.

Treasuries sank on the equity success and emerging markets reeled in by 21 basis points to a spread of 361 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.

Petrotrin leads new corporates

Petroleum Co. of Trinidad and Tobago continued its upward climb on Friday, with one buysider describing the credit as "on fire."

The 9¾% bonds due 2019 were better by 1 point at 107 bid.

The market was not as generous to Malaysia's Petroliam Nasional Bhd.

The sukuk due 2014 and conventional bond due 2019 were priced at Treasuries plus 162.5 bps on Aug. 5.

On Friday, the sukuk due 2014 was seen at a spread of 200 bps, while the conventional bond due 2019 was spotted slightly tighter at 195 bps.

Mexico's Grupo Petrotemex SA de CV saw a buyer at 99 on Thursday, the buysider said, but largely sellers had little luck offloading the 9½% bond due 2014, which priced at 99.029 on Aug. 12.

Brazil 'incredibly rich'

Brazil's bonds have performed well in recent sessions, and the country has been the subject of many new-issue rumors.

"Brazil is incredibly rich," said Enrique Alvarez, a Latin America debt strategist at think tank IDEAglobal.

"They can issue at will here, without a major problem," he said, and added "it would surprise me if they don't come."

The 7 1/8% Brazilian sovereign bonds due 2019 added 0.15 point to 103 3/8 bid, 104.15 offered.

Argentina swap sparks LatAm

Latin America saw bright spots in Argentina with some positive activity in Peru and Venezuela, said IDEAglobal's Alvarez.

Everything else was "either in drift mode or upside mode," he said.

Argentina moved closer to completing a 9 billion peso debt swap of Boden 14s for inflation-linked paper held largely by public corporations.

The changing of the inflation-linked bonds will allow the government to recalculate inflation in a different and presumably more honest or accurate way, Alvarez said.

Finance minister Amado Boudou indicated that reworking the inflation index is his intention, but "Fernandez, any chance she gets, tries to cut his legs off," Alvarez said about president Cristina Fernandez Kirchner.

The legislature also granted her the authority to extend the taxes on grain exports, which sparked so many farm strikes, for another year.

Kirchner is able to use that as a bargaining chip to limit pro-business policy.

Buenos Aires kicks in 600 million pesos

Also, many in the market expressed skepticism or worse over Buenos Aires' decision to provide nearly 600 million pesos to fund televised soccer.

The national league delayed the season opening matches as no broadcast agreement was in place.

"I find it amazing that Argentina, the government, is spending 600 million pesos to provide free soccer on TV, while you have almost 35% of the population below the poverty line," said an economist focused on Latin American markets.

"Just ridiculous...welcome to Latin American populism," he said.

"Today is a historic day for football, for the [Argentine Football Association], for Argentines and for the possibility of living in a more just and democratic society," said Kirchner on Friday.

Still, the 8.28% Argentine discount bonds due 2033 jumped 2½ points to 63 bid, 64½ offered.

Also in Venezuela, the bonds benefited from a recent bump in oil prices.

Light sweet crude was seen trading as high as $74 per barrel.

The 9¼% Venezuelan government bonds due 2027 improved by 1½ points to 73½ bid.

Also, the Peruvian 8¾% bonds due 2033 were better by 1 point to 124 bid, 125 offered.

Emerging Europe rides higher

Emerging Europe enjoyed the ride higher even as thin volumes did not carry levels very far.

In Ukraine, prime minister Yulia Tymoshenko touted the country's joint future with the European Union.

"Ukraine has built fundamentally new relations with the E.U.," she said, according to the Itar-Tass News Agency.

"At the end of this year or early next year we plan to sign with the E.U. a special agreement on political association," she said.

The Ukrainian presidential elections slated for Jan. 17, 2010 are expected to center largely on whether the country will move closer to the West or to Russia.

The Ukrainian sovereigns due 2016 added ½ point to 82 bid, 82.2 offered.

Meanwhile, Russia's government bonds due 2030 added 5/8 point to 102 bid.

Asia looks for yield

Asia lagged along with many of the higher yielding sectors in the market, a buysider said.

Malaysia saw some downside, but the higher-yielding credits made improvements.

In the Philippines, the bonds due 2030 took on 0.65 point to 127.9 bid.

Meanwhile, Indonesia's bonds due 2019 were seen better by 1 point to 133½ bid.

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