Emerging markets see bounce; buyers return to Brazil, Indonesia, Mexico; liquidity remains scarce

By Aaron Hochman-Zimmerman

New York, Oct. 28 - Emerging markets rebounded along with equity strength on Tuesday.

Investors were still baffled by the market's extreme volatility but were encouraged by the markedly higher close.

Argentina was largely left out of the rally as the country grappled with the pension fund nationalization, although Latin America's investment-grade players as well as Indonesia led the charge on the credit side.

Indonesia's benchmark bonds due 2018 tacked on 5 points.

From the major markets, U.S. equities scored big as volatility plummeted by 13.10 to 66.96, according to the VIX index. The index is a common measure of market volatility.

Emerging market spreads wrapped in tighter on Tuesday as 78 basis points melted away from the EMBI+ index leaving the spread at 765 bps, according to JPMorgan Chase & Co. The EMBI+ calculates the amount of extra yield investors are willing to accept to hold assets in emerging market debt.

LatAm follows equities, currencies

Latin America showed a sturdy recovery on Tuesday, but the gains were difficult to quantify as the market still struggles with illiquidity.

"I don't really see the stronger flows," said Enrique Alvarez, a Latin America debt strategist at think tank IDEAglobal.

"We still have a lot of illiquidity in place," he said. "I still don't see a 1-point bid-offer spread at any one specific space."

In Argentina, the social welfare and budget committees of the lower house of the legislature began to consider president Cristina Kirchner's pension fund nationalization plan on Tuesday.

The funds hold assets worth nearly $30 billion, according to the Buenos Aires Herald.

"The markets continue to react negatively," Alvarez said about the pension plan.

The pension funds themselves have been busy liquidating and selling off assets since the plan was announced, he said.

The 8.28% Argentine discount bonds due 2033 could not match the rest of the sector's rally pace as the bonds were seen unchanged at 22.5 bid, 24 offered.

The other key high-betas Venezuela and Ecuador "are still very much in sync with what's going on in oil prices," Alvarez said.

Light sweet crude was seen trading at $63 per barrel.

The Venezuelan 9¼% government bonds due 2027 added 4 points to 55 bid, 56.5 offered.

Mexico, Brazil lead category

Among the high-grade credits, Mexico "has been the top performer within the credit range," Alvarez said.

"They intend on selling less sovereign paper on the long end of the Mbond curve," he said. "They will sell shorter-term paper" in order to "take advantage of the mismatch in rates."

In addition, the legislature is "trying to get a measure passed that would let the pension funds buy into the shifts in the curve much more rapidly," he said.

Bond investors reacted well as the news was supported by a strong day for the peso as well as the equity market.

The peso was seen trading at 13.035 to the dollar.

The 5 5/8% Mexican bonds due 2017 were better by 4 points at 84.5 bid, 87 offered.

Elsewhere, Brazil "was only a runner up to Mexico as far as performance scale was concerned," Alvarez said.

Buying in equities and the real helped spur buying in the credit market, especially among the core credits, Alvarez said.

The real was seen trading at 2.164 to the dollar.

The 7 1/8% Brazilian bonds due 2037 took on 4 points to 84 bid, 84.9 offered.

Asia 'feeling a lot better'

In Asia, "the volatility has been insane," a trader said.

Still, "net-net, everyone left here feeling a lot better," he said.

"We saw clients back in, putting money to work across the board," he said.

"Some of the diciest credits of the past - Indonesia, Pakistan - were the outperformers," he said.

"The Philippines feels a little heavy," he said.

Meanwhile in the Philippines, the government again turned down bids from banks for three-month and one-year Treasury bills, according to the Treasury Department.

If accepted, the rate of the three-month bills would have risen 143 bps to nearly 7 1/8%, while the one-year notes would have jumped 222 bps to nearly 8¾%.

Still, banks only bid on PHP 4.05 billion rather than the full PHP 5 billion offered at auction.

Despite the failed auction, the government plans to borrow PHP 51 billion in the fourth quarter, according to the Manila Times.

The Philippine sovereigns due 2030 were seen at 92 bid.

In Indonesia, the rupiah was slammed, but that is more of "a local market issue," the trader said.

"It didn't seem to discourage a lot of the guys," he said.

The rupiah was seen trading at 10,654.29 to the dollar.

The Indonesian government bonds due 2018 were better by nearly 5 points at 60 bid.

In Pakistan, the country's finances are in need of IMF assistance without delay, according to German foreign minister Frank-Walter Steinmeier.

"I hope the decision will be taken soon. It won't help to have it in six months, or six weeks," Steinmeier said.

"Rather, we need it in the coming six days," he said at a meeting with Pakistani foreign minister Shah Mehmood Qureshi.

At the meeting, Steinmeier pledged Germany's support to help Pakistan negotiate with the IMF.

The Pakistani sovereign bonds due 2017 were quoted at 35 bid.

Emerging Europe improves

Emerging Europe traded well, but many countries from the sector were at the door of the IMF finalizing loans or asking for counsel.

Ukraine and Hungary as well as Iceland have already received commitments of aid from the IMF, while Romania and Bulgaria came looking for advice only.

Meanwhile in Russia, China premier Wen Jiabao continued his meetings with prime minister Vladimir Putin at an economic forum in Moscow on Tuesday.

The scope of the economic relationship between the two countries remains relatively small, said Russian vice prime minister Alexander Zhukov, according to the Itar-Tass News Agency.

"I believe that it is necessary to give the main attention at the forthcoming forum to detailed analysis of problems emerging in the practical implementation of pilot projects of investment cooperation between Russia and China, as well as to jointly outline the ways of removing the existing obstacles," Zhukov said.

Meanwhile, Russia will extend the first $1 billion tranche of a $2 billion 15-year loan to Belarus in November, Russian deputy finance minister Dmitry Pankin said.

Minsk will receive the remaining $1 billion in the first quarter of next year, after the 2009 budget is finalized, he said.

Also in emerging Europe, despite its liquidity problems, Turkey does not need IMF assistance, said central bank governor Durmus Yilmaz, according to the Turkish Daily News.

"We are facing a serious dollar liquidity problem at the moment. Some measures must absolutely be taken in order to avert this issue," he said, although, "As the Turkish Republic, we do not need the IMF's funds at the moment."

Over the weekend, prime minister Recep Tayyip Erdogan said he would refuse any IMF funds or any instructions from the Washington, D.C.-based lender.

"If you are prepared to reach an agreement based on flexibility on our budget and on our growth at this point, then we will sit down and sign," Erdogan said to the IMF.

Ankara still owes about $9 billion to the IMF after securing a $10 billion loan in May, according to the report.

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