Emerging markets firm; Argentine benchmarks pummeled; Primary waits for Vimpelcom, Nine Dragons

By Aaron Hochman-Zimmerman

New York, April 21 - Emerging markets improved slightly on a quiet day in trading, which saw Treasuries slip back and spreads narrow.

The primary lost its six-day pricing streak, but sources were confident the market would remain open.

"We don't see it as a fluke," a syndicate desk official said about the previous two weeks in the primary.

China's Nine Dragons Paper Ltd. announced Monday it may price $300 million of five-year notes, a market source said.

In trading, the market lost confidence in Argentina's discount bonds due 2033 to the tune of 2.25 points, as no noticeable progress was made between the government and the heavily taxed farmers.

However, there has generally been a better risk environment, said Enrique Alvarez, a Latin America debt strategist at think tank IDEAglobal.

Although, "we may see a little downside pressure coming from U.S. Treasuries," he said.

As earnings came in from Bank of America, equities traded mixed, sending volatility up by 0.37 to 20.50, according to the VIX index. The index is a frequently used gauge of market volatility.

As a sector, emerging markets narrowed 4 basis points to a spread of 265 bps, according to JPMorgan's EMBI+ index. The EMBI+ determines the amount of extra yield investors will require to hold assets in emerging markets debt.

High betas drag on LatAm

Latin American trading was quiet but improving although the high betas suffered as political risk pressured prices lower.

Venezuela was "not doing terribly" on Monday, said IDEAglobal's Alvarez, noting the backdrop of recent cement and steel nationalizations.

The country issued another $3 billion on the domestic market, which "satisfied some of the liquidity needs for dollars," he said.

However, if more issuance is forthcoming it may "flood the market with dollar paper, which presses down prices" and widens spreads, he said.

The 9¼%Venezuelan bonds due 2027 were lower by 0.45 point to 94.05 bid, 94.4 offered.

Latin America's more stable credits performed better.

Brazil's 7 1/8% bonds due 2037 added 0.15 point to 112.7 bid, 113 offered.

Colombia's 7 3/8% bonds due 2037 were quoted unchanged at 111.4 bid, 111.9 offered.

Farmers plow under benchmarks

In Argentina, "things are becoming more confrontational," Alvarez said.

The farmers have repeatedly accused the government of being disinterested in negotiations, according to news reports.

"If, over the next 15 days, we find we have been wasting our time and no concrete solutions are found, farmers are going back to the streets again, I don't know in which way, but we will certainly voice our demands," said Luciano Miguens, head of the Argentine Rural Society, according to the Buenos Aires Herald.

The government has threatened to use the military to clear roadblocks and secure order if it becomes necessary, Alvarez said.

The suspension of the strike is scheduled to expire on May 2.

The 8.28% Argentine discount bonds due 2033 were beaten lower by 2.25 points to 80.5 bid, 80.8 offered.

Vimpelcom pricing this week?

In the primary, Russia's OJSC Vimpelcom is on the road until Thursday with its benchmark dollar deal and expects to price this week in an environment that still feels productive, a market source said.

"There's a lot of positive energy from last week and the week before," the source said.

Meanwhile, Nine Dragons Paper Ltd. (BBB-/BBB-) announced its plans to offer $300 million of five-year guaranteed senior bullet notes.

A roadshow began on Monday, but pricing is expected as early as Tuesday.

Merrill Lynch will act as bookrunner for the deal.

The coupon will step up by 100 bps if the rating falls below BBB- and by 200 bps if it falls below BB.

There is a change-of-control put at 101.

Proceeds will be used for capital expenditures for the purchase and construction of paper machines and supporting facilities as well as to refinance a portion of its existing bank loans.

Nine Dragons is a Guangdong, China-based paper producer.

"I think the whole issue with issuance generally has followed a very odd course this time around," a trader said.

"The market's been really strong and there just hasn't been anything in the way of issuers," he said.

The deals which have been completed are from "quite peripheral issuers in the scheme of things," he said.

The amount of issuance has to a large extent consisted of local-currency offerings, but "it's not following the normal path of what you'd expect in this type of environment," he added.

Quiet Asia holds on

Asian trading was quiet but "still very firm," a trader said.

"Hedging instruments have been pulling back," he said, "Cash is reasonably strong."

In the Philippines, the central bank announced that it predicts the economic growth will be sustained in the first quarter despite inflation concerns.

Remittances will help push the economy to between 6.5% and 7% growth, said an unnamed official at the central bank, according to the Manila Times.

With the rise in commodities, inflation hit a 20-month high at 6.4% in March, up from 5.4% in February, the report said.

The peso was seen trading at 41.84 to the dollar.

The Philippine sovereign bonds due 2030 were quoted at 131.875 bid, 132.375 offered.

In Indonesia, the state ministry from state enterprises announced it hopes to cut losses from state-run companies by 92% in 2008, the Jakarta Post reported.

In 2007, a prognosis of state firms estimated that nearly 28 companies are losing nearly 2.94 trillion rupiah, the report said.

The losses come from a combination of mismanagement, inefficiency and commitments under the public service obligation (PSO), which requires government companies to place the public good ahead of profits.

Power company PT Perusahaan Listrik Negara operated at a loss from 2003 to 2007. PT Merpati Nusantara Airlines and PT Kereta Api Indonesia and nine others are not expected to overcome their deficits this year.

The Indonesian sovereigns due 2017 were seen at 103.75 bid, 104.25 offered.

In Pakistan, U.K. foreign secretary David Miliband announced the United Kingdom's support for negotiations between the government and Islamic militants, on the condition that the militants are prepared to renounce violence, according to a BBC report.

The announcement came after meetings with new prime minister Yusuf Raza Gillani and president Pervez Musharraf.

The Pakistani government bonds due 2016 were spotted at 85 bid, 89 offered.

Also in Asia, diplomatic relations between China and France warmed on Monday as president Nicolas Sarkozy sent an apology to a Chinese athlete who was accosted by a protester as she carried the Olympic torch through Paris in her wheelchair.

Sarkozy has discussed the possibility of a boycott of the Beijing Olympics opening ceremonies.

Emerging Europe firms

Trading in emerging Europe showed mild tightening but largely stayed quiet as market watchers looked ahead to the week in the primary for Russia's OJSC Vimpelcom, which finishes its roadshow on Thursday.

Elsewhere in Russia, banks will be able to maintain operations despite concerns over a lack of liquidity, said deputy prime minister and finance minister Alexei Kudrin.

Russian banks have applied to the government for 23.6 billion rubles, and "we have fully satisfied all applications, and this result has shown that there is no shortage of liquidity for paying wages," Kudrin said, according to the Itar-Tass News Agency.

Also on Russia's Pacific coast, construction of a special economic zone is planned at the port of Vostochny, Itar-Tass reported.

The project to help link Russia with Asian economies will cost 180 billion rubles to build and is expected to draw annual revenues of 62 billion rubles.

The zone is expected to be fully operational in 2020.

Russian MiG fires on Georgian drone

Elsewhere, over Georgia's breakaway region of Abkhazia, a Russian MiG-29 fighter reportedly shot down a Georgian unmanned reconnaissance drone.

The Russian air force denies the incident.

The two governments have been at odds over the independence of Georgian provinces Abkhazia and South Ossetia, which are largely ethnically Russian.

However, postal service between the two former Soviet states resumed on Monday.

Mail service was halted in October 2006.

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