Emerging markets fiercely higher; Abu Dhabi, Qatar improve; EMBI+ spread sinks through 600 bps

By Aaron Hochman-Zimmerman

New York, April 3 - Emerging markets held tightly to the sector's rally even as U.S. equities saw some Friday selling and ended just slightly higher.

The $6 billion worth of new issues from Abu Dhabi and Qatar were digested well even as the primary calendar cooled and Latin America finally surged ahead as the other sectors have in recent days.

Spreads were also drastically tighter and moving in constantly over a high volume of trade.

For its part, Venezuela traded above the key level of 60 bid by adding 1.3 points to its benchmark bonds due 2027.

Still, the emerging markets' recent and sharp improvement was not enough to save the entire first quarter from $3.18 billion of outflows during the first three months of the year.

Emerging market bond funds only saw inflows during two of the weeks from Jan. 1 to the week ended March 25, according to EPFR Global.

During the same period in 2008, $491 million was brought into the category.

The recent volatility has presented opportunity, but risks as well, a trader said.

"Be nimble in this market, stay light-risk and get your money," he said.

"Don't try to be too clever," he said.

The persistent rally helped many indexes and indicators break through key levels. Volatility fell below 40.00 as it lost 2.34 to close at 39.70, according to the VIX index. The index is a frequently used yardstick of market volatility.

The rally also reeled emerging markets spreads in through the 600 basis point mark as the EMBI+ tightened by 29 bps to a spread of 580, according to JPMorgan's EMBI+ index. The index estimates the amount of extra yield investors will demand to hold assets in emerging market debt.

Emerging Europe stretches to new tights

Emerging Europe pushed even tighter on Friday, "... just when you thought it wouldn't go any further," said a trader.

"I haven't seen moves like this for a while," he said about spreads, and "cash has just rocketed."

Even the volumes have increased nearly 10 fold, he said.

Trades, which had been moving in amounts of $1 million, were now more likely $10 million, he said.

In Central Europe, Bulgaria and Romania have been halved in spread terms in recent sessions, he said.

Both are "50% off," trading near 400 bps mid, he said.

He suggested investors not tempt fate with overly aggressive positions in the face of the current tights.

"Be very careful with that kind of volatility," he said.

Hungary was a slight underperformer trading at 470 bps mid, he said, as most of the interest in the Central European credits came from local investors.

Meanwhile farther east, Russia finance minister Alexei Kudrin told reporters that Moscow has made no commitment to support any part of the $1.1 trillion loan package that came out of the G-20 meetings, according to the RIA Novosti News Agency.

Russia already has a $10 billion facility for its neighboring countries, he said.

"We believe we play the role of an elder brother for our region," he said.

Kudrin also suggested that the International Monetary Fund issue bonds, which Russia might buy to diversify its international reserve.

The Russian bonds due 2030 saw "aggressive buying" and added 1.25 points to 96.25 bid, 96.375 offered, a trader said.

Meanwhile in Ukraine, president Victor Yushchenko said he is ready for early presidential elections.

The statement came as the chief opposition party was led on a protest march by Viktor Yanukovych.

Yushchenko would likely face a campaign fight from Yanukovych and prime minister Yulia Timoshenko.

In Turkey, prime minister Recep Tayyip Erdogan said that he will invite the IMF delegation to Turkey to finalize talks for what may be a $50 billion loan.

Many were encouraged by the show of support for the IMF in the G-20 meetings, but Turkey's bonds have performed well even in the absence of an agreement.

The Turkish sovereigns due 2030 added 0.75 point to 139.75 bid, 141.25 offered.

Abu Dhabi, Qatar trade better

The $3 billion issues from Abu Dhabi and Qatar were absorbed into the hectic market without much trouble, a trader said.

The bonds traded lightly, but toward the upside, he said.

The 5½% Abu Dhabi bonds due 2014 traded up 0.55 point to 99.9 bid, 100 offered, while the 6¾% bonds due 2019 were better by 0.5 point to 99.65 bid, 99.85 offered.

The 5.15% Qatari bonds due 2014 added 0.1 point to 100 bid, 100.1 offered, while the 6.55% bonds due 2019 slipped 0.2 point to 99.45 bid, 99.65 offered.

LatAm 'finally' sees strong bounce

"LatAm finally got a good dose of the pull from the new psychology of risk tolerance which appears to be coming from the U.S. equity side," said Enrique Alvarez, a Latin America debt strategist at think tank IDEAglobal.

The swings were reminiscent of "the old emerging market debt markets," Alvarez said.

The market broke through some significant price levels but also plunged through the 600 bps barrier on JPMorgan's EMBI+, which is "important," he said.

Brazil and Mexico led the category higher, but the "high-beta has been tagging along," he said, even though many "did not expect them to be ready for an upswing."

Generally, the levels improved in step.

"The scoreboard is pretty even," he said.

Argentina's 8.28% discount bonds due 2033 added 1.25 point to 28 bid, 28.25 offered, while Venezuela's 9¼% government bonds due 2027 pushed past 60 bid as it tacked on 1.3 points to 60.125 bid, 61.55 offered.

The 5 7/8% Brazilian sovereigns due 2019 improved by 1 point to 98.5 bid, 99.5 offered, while the 5 7/8% Mexican bonds due 2014 improved by 0.25 point to 105 bid, 106 offered.

The safest of the category's credits, Panama and Peru, underperformed but may soon find themselves swept up in the rally, Alvarez said.

Asia spreads tighten

Asia performed well as the market's enthusiastic sentiment ran through every sector.

Equities in the United States were only slightly positive, but spreads showed significant tightening.

In the Philippines, domestic liquidity improved by 14.6% in February compared to 16.1% in January and 6.8% in February 2008, the central bank reported.

The growth was fueled by 25.7% higher net foreign assets, said bank governor Amando Tetangco.

The peso was seen trading at 47.85 to the dollar.

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