Emerging markets fall on externals; spreads hold; Eksportfinans prices 5.4 million Turkish lira

By Aaron Hochman-Zimmerman

New York, Feb. 14 - Emerging markets were at the mercy of the headlines from the United States, which dragged down prices across the sector.

Spreads were held in check as Treasuries were hurt by inflation worries that bubbled up in reaction to the Senate testimony of Federal Reserve chairman Ben Bernanke.

"I don't get a sense that there's been a whole lot of flow one way or another," a portfolio manager said.

"The big thing going on is Treasuries getting smoked," he said.

In trading, prices were flat at best, but the high-betas in Latin America took the most damage.

Brazil led the retreat by shedding 1.25 from its bonds due 2037.

The primary produced a small deal for 5.4 million Turkish lira from Norway's Eksportfinans.

In honor of Valentine's Day, one Latin American trader prophetically posted "Happy Overdue for Negative Headline Day" on his computer screen.

It may not have been happy, but Thursday's headlines put the roadblocks in front of the mid-week rally as Fed chairman Bernanke offered his glum economic outlook to Congress.

Although Bernanke did indicate that further rate cuts may be forthcoming, "the outlook for the economy has worsened in recent months, and the downside risks to growth have increased," he said in his testimony to the Senate Banking Committee.

"Over the four quarters of 2007, the price index for personal consumption expenditures (PCE) increased 3.4%, up from 1.9% during 2006," he said concerning inflation.

At the news of Moody's Investors Service's downgrade of the Financial Guarantee Insurance Co. to A3 from Aaa, things just got worse, the trader said.

Elsewhere, president George Bush put his signature to the final version of the $167 billion economic stimulus plan.

Also, Switzerland's UBS put a drag on the market as it reported a $4 billion loss during 2007, according to a press release.

Volatility made a steady climb through the morning and plateaued in the afternoon to close higher by 0.66 at 25.54, according to the VIX index. The index is a commonly used gauge of market volatility.

Treasuries backed up as emerging markets held in at a spread of 277 basis points, according to JPMorgan's EMBI+ index. The EMBI+ calculates the amount of extra yield investors will demand to keep money in emerging markets debt.

Emerging Europe holds ground

Prices in emerging Europe had no direction on thin volumes as investors spent most of their attention on news from the United States.

Turkey's central bank reduced its overnight borrowing rate 25 bps to 15.25% and reduced the overnight lending rate 25 bps to 19.25%, according to a press release.

Also, Turkish Petroleum Corp. struck a deal with Colombia's national oil firm, Eco-Petroleum, to dually manage the development of a Colombian oil deposit estimated at $2 billion to $3 billion, according to the Turkish Daily News.

Turkish Petroleum is also exploring the possibility of creating similar arrangements in Venezuela and Ecuador, the report said.

The Turkish sovereigns due 2030 were better by 0.125 to trade at 154.375 bid, 154.5 offered.

Russia first deputy prime minister Dmitry Medvedev said Russian gas can be shipped to Ukraine at any time, but Kiev will have to pay approximately one-third more than the $170 per 1,000 cubic meter rate it is paying for Central Asian gas, the Itar-Tass News Agency reported.

The two countries agreed to establish new joint exporting and importing companies to streamline Russian fuel sales to Ukraine, but if Ukraine is to use the cheaper Central Asian gas, the old system will need to stay in place, Medvedev said.

The Ukrainian sovereign bonds due 2016 were quoted flat at 99.875 bid, 100.375 offered.

Meanwhile, president Vladimir Putin called the recognition of an independent Kosovo immoral and illegal.

The Russian government bonds due 2030 were up by 0.1 to trade at 114.1 bid, 114.35 offered.

In Kazakhstan, president Nursultan Nazarbayev announced a moratorium on inspections of small- and medium-sized businesses, according to the Itar-Tass News Agency.

The move is intended to allow businesses to grow without the interference of government.

The freeze does not include businesses that produce food or medicine.

Elsewhere, in Africa "high food prices and market uncertainties have become major global concerns, and wide access to up-to-date information and analysis is becoming critical," said Henri Josserand of the United Nations' Food and Agriculture Organization's Global Information and Early Warning system in a press release.

"Cereal imports for all low-income food-deficit countries in 2007/2008 are forecast to decline by about 2% in volume, but as a result of soaring international cereal prices and freight rates, their cereal import bill is projected to rise by 35% for the second consecutive year," the release said. "An even higher increase is anticipated for Africa."

LatAm pushed down by headlines

Prices were hurting in Latin American trading, but spreads "didn't want to go wider," a trader said.

On the light volumes, spreads held in as inflation concerns reeled in Treasuries.

Mexico has made strides in its trade agreements since its 2002 review by the World Trade Organization, and its "economic performance has been solid," according a WTO press release.

Still, Mexico would benefit from greater competition in the domestic market.

"Further structural reforms would contribute to reducing bottlenecks in areas such as energy, telecommunications and transport," according to the release.

The Mexican sovereigns faired better than some of the other Latin American issues, the trader said. The 5 5/8% bonds due 2017 fell by 0.4 to 102.5 bid, 102.8 offered.

In Brazil, police announced one of the country's largest seizures of illegally razed lumber in the state of Para, according to the BBC.

Nearly 353,000 cubic feet of lumber was taken into custody.

The Brazilian 11% sovereigns due 2040 were lower by 1 point at 132.5 bid. The 7 1/8% bonds due 2037 were down 1.25 to trade at 105.75 bid, 106.25 offered.

Argentina's 8.28% discount bonds due 2033 fell by 1.25 to trade at 88.5 bid, 90 offered.

Venezuela's 9¼% government bonds due 2027 dropped only 0.15 to 99.1 bid, 99.5 offered.

Slow Asia left unchanged

Trading in Asia was tamped down by gloomy headlines and equity sluggishness.

The rally, formed on the coattails of equities, was not able to sustain itself into the weekend as some had expected, a portfolio manager said.

Investors should never be too pessimistic in bad times, or too optimistic in good times, he said.

In the Philippines, the central bank posted outflows of $237 million from foreign investment accounts during January, according to the bank's web site.

"This developed due to lingering fears of a U.S. recession and soaring oil prices which overshadowed the marked improvement in the country's economic fundamentals in 2007 ... The reductions in key policy interest rates by the U.S. Federal Reserve and [Philippine Central Bank], may have only partly tempered the net outflow," the bank said in a statement.

Meanwhile, government security services announced the discovery of a plot to assassinate president Gloria Macapagal Arroyo and other government officials.

The Islamic extremist group Jemaah Islamiyah was responsible for the planning of the attack, security chief Brig. Gen. Romeo Prestoza said.

The Philippine bonds due 2030 fell 0.5 to 129.75 bid, 130.5 offered.

Indonesia's sovereign bonds due 2018 were quoted at 103.75 bid, 104.125 offered.

In Pakistan, the majority of the population believes that president Pervez Musharraf has a negative impact on the country's overall stability, according to a BBC poll.

The 1,400-person study found that support for Musharraf has fallen, and despite his promises, many are suspicious of the legitimacy of Monday's elections.

The Pakistani sovereigns due 2017 were spotted unchanged at 83 bid, 87 offered.

In China, the government will have to use 60% Chinese built parts in its automotive factories or face higher taxes, according to a ruling by the WTO, the BBC reported.

In response to filings by Canada, the European Union and the United States, the Chinese practices were found to be too protectionist and outside of WTO regulations.

Eksportfinans prices 5.4 million lira bullet

Eksportfinans ASA priced a $5.4 million Turkish lira 13-month bond at par with a coupon of 13½%.

Lehman Brothers acted as the bookrunner for the registered deal.

The non-callable bonds mature on March 26, 2009.

Eksportfinans is an Oslo-based municipal financier.

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