Emerging markets battered at start of short week; high-betas slide; Kiev prices $250 million

By Aaron Hochman-Zimmerman

New York, Nov. 19 - On the first day of a short trading week in the United States leading up to the Thanksgiving holiday, emerging markets were wider as trading desks were already becoming understaffed.

The light volumes supported a few of the benchmark bonds which posted small gains, but mostly it was "more of the same - and more of the same these days is ugly," said one trader.

"It felt like there wasn't a whole lot of liquidity [Monday]," he said.

There were pockets during the session which looked as though they might have provided a bounce, but each one fell through, he said.

"Maybe next week, the same thing," a buyside source said about the market's prospects for when it returns from the Thanksgiving holiday.

"The secondary market continues to follow what takes place in the U.S. equity market," said Jefferies & Co.'s head of emerging markets, Erich Bauer-Rowe.

As they unwind positions in illiquid assets, investors are tending towards the liquid credits, causing the illiquid bonds to continue to underperform, he said.

Overall, "the brunt of it has been felt by Venezuela and Argentina," he said.

Argentina watched its discount bonds due 2033 tumble by 1.6 points during Monday's session.

It was Sunday's downgrade of Citigroup to "sell" by Goldman Sachs equity analysts that provided the gloom which was hanging on Monday's faltering market, the trader said.

Still, the primary provided more action than some market watchers had bargained for as the City of Kiev priced a $250 million five-year bond at par with a coupon of 8¼%.

Other issuers were busy arranging new deals and announcing talk.

Volatility only rose 0.52, despite the equity drop, and finished the session at 26.01, according to the VIX index. The index is the common gauge of market volatility.

As a sector, emerging markets widened by 7 basis points to a spread of 241 bps, according to JP Morgan's EMBI+ index. The EMBI+ measures the amount of extra yield required by investors to keep assets in emerging market credits.

LatAm, high-betas sinking

The high-beta credits were the hardest hit as liquidity was a rarity and timidity common, according to one trader.

"The spreads have widened significantly," said Jefferies' Bauer-Rowe.

Argentina was roughed up as it widened by 20 bps and lost 1.6 from its 8.28% discount bonds due 2033. The bonds were quoted at a bid of 92.9.

Venezuela lost just 0.25 from its 9.25% bonds due 2027 as oil prices were up again.

Monday, OPEC announced its decision to hold oil production at its current level, leaving light sweet crude at $95 per barrel by the day's end.

Oil continues to linger just below the $100 per barrel mark.

Brazil's Nov. 8 announcement of the discovery of a five to eight billion barrel off-shore oil field may make Brazil a larger oil producer than Mexico or Canada, according to a New York Times report.

If the oil reserve is as large as expected, in the Americas only Venezuela and the United States would have a larger production capacity than the country which ironically has been so determined to convert to sugar-based ethanol power.

Brazil's government bonds due 2037 gained 0.1 to trade at 112.625 bid, 113 offered.

Primary active on short week

Many investors had almost written off the chances of any action in the primary during a halved week in the U.S. bond market, but the team leading the deal from the City of Kiev managed to price a $250 million five-year bond (B1/BB-) at par with a coupon of 8¼% to yield 8¼%.

The deal priced with a spread of 463.5 bps over Treasuries.

But the deal came wider than talk for a yield in the 8% area.

Credit Suisse, Deutsche Bank, UBS and Citigroup had the books for the deal.

Other issuers were talking their deals.

Venezuela's Corporacion Andina de Fomento has mandated the Nomura Group to lead a three-year samurai bond.

The deal has been talked at yen Libor plus 30 bps to 37 bps.

The issuer is a Caracas, Venezuela-based development bank.

Brazil's Banco Cruzeiro do Sul SA released talk of 7¾% for its upcoming dollar-denominated three-year bond (Ba1) issue.

BCP Securities will act as the bookrunner for the deal.

Banco Cruzeiro is a Sao Paulo, Brazil-based commercial and retail lender.

Elsewhere, another sovereign issuer is making preparations to offer a new bond.

The Arab Republic of Egypt has asked HSBC and Merrill Lynch to lead its upcoming Egyptian pound-denominated eurobond (Ba1/BB+/BB+).

On July 12 the country priced a 6 billion Egyptian pound five-year sovereign at 99.504 with coupon of 8¾% to yield 8 7/8%.

Asia stuck in pre-holiday illiquidity

"Hesitancy" and "not a whole lot of guys around," added up to another difficult day in Asian credits, according to a trader.

The Philippines's benchmark bonds due 2030 managed to add 0.25 to trade at 131.75 bid, 132.125 offered.

Meanwhile, Indonesia's benchmark sovereigns due 2017 held unchanged at 103.5 bid, 104 offered.

Pakistan's new supreme court threw out many of the cases brought before the recently sacked supreme court which would have prevented president Pervez Musharraf from seeking another term in office.

Still, opposition leader Benazir Bhutto and her party withdrew formal objections to Musharraf's bid for another term because they do not recognize the legitimacy of the new court installed under the state of emergency.

The president has stated he will retire from the army if he is re-elected.

The Pakistani bonds due 2017 were again difficult to pinpoint, but traded at approximately 86 bid, 89 offered.

Europe weaker with equities

Emerging Europe suffered, but less so than Latin America on the light volumes and lower equities dealt with by all of the market sectors.

Still, the benchmarks were mixed and only slightly changed.

Turkey's sovereign due 2030 was quoted down 0.375 to trade at 157.625 bid, 157.75 offered.

Meanwhile, traditional adversaries Turkey and Greece opened a joint pipeline Sunday that creates an oil conduit between Europe and the oil producing Caspian Sea without passing through Russia or the Middle East.

In Russia, authorities have arrested deputy finance minister Sergei Storchak who is under suspicion of allegedly attempting to steal $43 million from the state treasury.

The Russian government bonds due 2030 gained 0.25 and were spotted at 112.625 bid, 112.875 offered.

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