Emerging markets gain momentum; Turkey's bonds see buying; Russia's Transneft offers new securities

By Aaron Hochman-Zimmerman

New York, July 29 - Emerging markets felt healthier on Tuesday thanks to a strong day in equities.

Still, volumes in the secondary market remained light as a one-day recovery from Monday's equity dive was not enough to send investors running back to jump into the risk pool.

"There's not a great deal of trading going on," a trader said in summation of the day's action.

Turkey managed to stand out in trading. Buyers returned after the credit was recently damaged by a political commotion in the country that still continues.

In the primary, Russia's OAO AK Transneft brought an offering of new bonds to the market in a deal that is expected to price on Thursday.

As equities rallied, volatility dropped steadily throughout the session, ending lower by 2.23 at 22.00, according to the VIX index. The index is a commonly used gauge of market volatility.

Treasuries were pushed back as emerging markets tightened by 8 basis points to a spread of 277 bps, according to JPMorgan's EMBI+ index. The EMBI+ determines the amount of extra yield investors are willing to accept to hold assets in emerging markets debt.

Emerging Europe tightens

Emerging Europe felt mildly stronger on Tuesday, according to one trader, but he added that for some time the market has been plagued by "a bit of a lack of direction."

The usual pattern of fits and starts often begins with weaker equities in New York followed by a weak London morning for credit, which then gives way to afternoon tightening, he said.

Russia's bonds tightened by about 4 bps back to levels seen last Friday, the trader said.

The sovereign bonds due 2030 were better by just 0.05 point to 112 bid, 112.125 offered.

Elsewhere, Ukraine's sovereigns were quoted at 90 bid.

Also, "Turkey was fairly strong today," the trader said, as it traded more actively than on Monday.

Meanwhile, Turkish companies have also been looking to take advantage of growing economies in the emerging world.

As the major markets, particularly in the European Union, continue to struggle with inflation, Turkish companies have turned to countries such as Iran, Iraq and Syria, the Turkish Daily News reported.

"We have not felt a negative impact yet; however, it is time to diversify exports," said Murat Akyuz, the owner of plastic firm Akyuz and chairman of the General Secretariat of Istanbul Mineral and Metals Exporters' Association, in the report.

Elsewhere, in response to bombings in Istanbul which killed 17, the Turkish air force conducted air strikes against Kurdish Workers' Party (PKK) targets in Northern Iraq.

The Turkish government bonds due 2030 were better by 0.9 point to 147 bid, 147.25 offered.

E.U. holds on Serbia accession

Also in emerging Europe, the process of Serbia's bid for E.U. accession will be delayed until former Serb president Radovan Karadzic is extradited to the U.N. war crimes tribunal in The Hague.

Judges in Serbia have not yet received an appeal against his arrest, reports said.

However, if one is received it is likely to be quickly rejected.

E.U. officials consider his arrest a positive step but note that it does not guarantee Serbia's membership.

Many in the European Union are skeptical that a majority in the country are in line with the West-leaning president Boris Tadic.

A crowd of 15,000 protestors, including some nationalist politicians, came out to support Karadzic in Belgrade on Tuesday night.

Some of his supporters threw flares and fireworks at riot police who returned fire with rubber bullets and tear gas.

More peaceful rallies have been held daily in support of both Karadzic and Serbian nationalism.

Transneft to price Thursday

The primary picked up its pace on Tuesday as OAO AK Transneft (A2/BBB+) announced it will offer five-year eurobonds.

Books are expected to close Wednesday with pricing on Thursday.

Proceeds will be used for investment projects and general corporate purposes.

Transneft is a Moscow-based gas pipeline operator.

The new bonds are expected by one market source between 7½% and 7¾% and seem to be a good buying opportunity.

The credit is supported by the government's tax policy, and the company maintains an encouraging balance sheet, the source said.

Transneft is expected to be cash flow positive by next year, the source added.

LatAm slides to the side

Latin America traded "to the lateral," said Enrique Alvarez, a Latin America debt strategist at think tank IDEAglobal, with "not a lot going on."

Monday and Tuesday's action in U.S. equities illustrate the idea that whether the Dow Jones Industrial Average adds or loses 200 points or more, Latin America reacts in the same fashion, he said.

"There's no risk appetite either way," he said, as the category has become largely divorced from the volatile externals.

There are also the summer doldrums to consider as well as a generally negative environment, which has not scared investors enough to inspire a broad sell-off of credit.

Argentina was a mild outperformer on Tuesday.

Its benchmark 8.28% discount bonds due 2033 were better by 0.5 point to 76.5 bid, 77.5 offered.

Venezuela also saw some small improvements even though light sweet crude was seen trading as below $121 per barrel.

The 9¼% Venezuelan sovereign bonds due 2027 were up by 0.15 point to 91.65 bid, 92.25 offered.

In Brazil, equities posted a strong day in the local market, but on the credit side "it's been sort of ho-hum," Alvarez said.

The 7 1/8% Brazilian government bonds due 2037 added 0.25 point to 100.65 bid, 111.75 offered.

Asia shakes off weak overnight

Asia ended weak on Monday and traded similarly weak in the local overnight session, but a 263-point gain for the Dow helped propel the sector to a much stronger sentiment, a trader said.

High-beta CDS narrowed by 5 bps to 7 bps while cash bonds generally add 0.5 point, he said, although overall flows were still very light.

Few issues stood out, but "Philippines is marginally an outperformer here," he said.

The sovereigns due 2030 were better by 0.375 point to 126.5 bid, 127.25 offered.

In Indonesia, the government may end the expansion of its reimbursement program for money oil and gas companies spend exploring for new energy sources, the Jakarta Post reported.

The program has been fraught with abuse and corruption due to a lack of transparency, the report said.

"In 1999 when our production was around 1.5 million barrels per day, government spending in cost recovery was only about $3.7 billion. But when our production declined to 1 million barrels per day in 2006, spending in cost recovery increased sharply to $9 billion," said Ryad Areshman Chairil of the Center for Indonesian Energy and Resources Law.

The new initiative would not apply to companies that already receive cost recovery exploration incentives.

The Indonesian government bonds due 2017 took on 0.5 point to 99 bid, 99.625 offered.

Also in corporates, Singapore's high-yield MagnaChip Semiconductor dropped 2.25 points from its 6 7/8% bonds due 2011.

Rates up in India, Pakistan

In Pakistan, the central bank raised its discount rate for commercial bank lending to 13% from 12%, the bank announced.

The Pakistani bonds due 2017 were spotted at 68 bid, 74 offered.

Meanwhile in India, the central bank hiked its repurchase rate to 9% from 8.5% to combat rising inflation.

The hike makes the third rate increase within the last two months.

"There isn't that much tradable in India, but what has been was generally weaker, but now is starting to firm up," the trader said.

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