Emerging markets narrow again; Mexico taps primary for $2 billion of bonds; Brazil bonds strengthen

By Aaron Hochman-Zimmerman

New York, Dec. 18 - Emerging markets broke a long primary market drought as Mexico successfully placed a $2 billion 10-year issue.

The bonds sold 40 basis points wider than the curve, but it was no small accomplishment to crack a market that has been shut since September.

Some investors believe that by taking advantage of a spate of tightening, Mexico may set an example for other highly rated issuers.

In trading, across emerging markets, bonds were strong thanks to the help from the Federal Reserve.

The high-grade credits led the charge with Brazil and Russia in front.

The Brazilian bonds due 2037 added 3 points to 110.75 bid.

Volumes continued to be modest, but despite more pain for equities, the tone was very encouraging, especially by Mexico.

Equities slipped into the close, but volatility eased by 2.5 to 47.34, according to the VIX index. The index is a common measure of market volatility.

As a sector, emerging markets tightened by 11 bps to a spread of 712 bps, according to JPMorgan's EMBI+. The EMBI+ calculates the amount of extra yield investors are willing to accept to hold assets in emerging market debt.

Mexico opens primary with $2 billion

Mexico smashed through a firmly locked primary market on Thursday by pricing $2 billion 10-year bonds at 99.784 to yield390 bps over Treasuries.

"It's a timing issue," said Enrique Alvarez, a Latin America debt strategist at think tank IDEAglobal.

Mexico must have figured "we're one of the two top tier names and the largest one ... there's money on the sidelines, yields are declining," he said. "They're taking advantage of that."

Mexico also had to offer up 40 bps more than the 350 bps the curve indicates, Alvarez said.

The timing of the deal was also ahead of many contractionary economic figures, which have not been released yet.

"Come January and February, they may not be able to get this off the ground," he said.

Still, "kudos to them for getting $2 billion off the market," he said, adding that this issue will likely fulfill Mexico's issuance goals for 2009.

"I wouldn't think they'd do anything more after that," he said.

The 5 5/8% Mexican bonds due 2017 were seen unchanged at 100 bid, 100.75 offered.

LatAm yields shrinking

Elsewhere in Latin America, "we've got a full fledged yield compression rally going on," Alvarez said.

"And it's all motivated, engendered and pushed by the U.S. Federal Reserve," he added. "It has curtailed yields across the spectrum."

With few exceptions, "everything is on the upside," he said.

In Argentina, the legislature passed a law clearing the way for the government to retake possession of Aerolineas Argentinas.

The nationalization comes after failed negotiations to buy the airline from the Spanish group Marsans.

Meanwhile, "the bonds are a little off," Alvarez said.

The 8.28% Argentine discount bonds due 2033 dropped 1.5 points to 29 bid, 31 offered.

The discount bonds will not move "much above 30 under the current conditions," he said.

"Venezuela is sliding," he said. "The impression is just very negative for the oil credits."

Crude traded near $42 per barrel, while the 9¼% Venezuelan bonds due 2027 fell 1.25 points 52.25 bid, 56.5 offered.

However, oil-producer Brazil had its high-grade strength.

The 7 1/8% Brazilian bonds due 2037 added 3 points to 110.75 bid, 115 offered.

Spreads tighter in Asia

As commodity prices and inflation risks continued to ease in Asia, the Philippines took the opportunity to cut interest rates.

The central bank reduced the overnight borrowing rate 50 bps to 5.5% and the overnight lending rate by 50 bps to 7.5%, according to a statement.

The decision was based on "the latest baseline forecasts, which reflect a decelerating inflation path over the policy horizon, with inflation falling within target by 2010, partly due to the sharp fall in November inflation which came earlier than expected," the bank said.

"This outlook is supported by the downward shift in the balance of risks, following the easing of commodity prices, the moderation in inflation expectations, and the expected slowdown in economic activity," the bank continued.

The peso was seen trading at 46.816 to the dollar.

Also in the Philippines, the National Economic and Development Authority expects foreign aid to thin as the world heads deeper into a global recession.

"[Official development assistance] has been going down in the past years," said Ralph Recto, NEDA's socioeconomic planning secretary, according to the Manila Times.

Still, as aid from the United States and Japan trail off, greater aid is expected from the Middle East, Recto said in the report.

Emerging Europe rides higher

In emerging Europe bonds were sturdy as rock-bottom interest rates in the United States wrapped spreads tighter in the emerging sectors.

Turkey followed the Fed with its own, larger-than-expected, rate cut.

The Turkish central bank cut rates by 75 bps, leaving the overnight borrowing rate at 16.25% and the overnight lending rate 17.5%.

"Recent readings indicate that the slowdown in the domestic economic activity has intensified," the bank explained in a statement.

"Moreover, the developments in oil and other commodity prices are having a favorable impact on disinflation. Looking ahead, the committee has judged that inflation will display a rapid fall in the forthcoming period," the statement said.

The lira was seen trading at 1.505 to the dollar.

The Turkish sovereigns due 2030 added 3.325 points to 138.5 bid.

In Ukraine, gas supplies from Russia may be cut off in the New Year if a $2 billion debt is not settled and a new contract signed, said Sergei Kupriyanov, a spokesman for Russia's state-run gas firm OAO Gazprom.

If no new contract is signed "we will have no legal grounds to supply gas to Ukraine starting from Jan. 1," he said.

Ukrainian president Viktor Yushchenko encouraged the fragile coalition in parliament to quickly pass the 2009 budget.

"There is expectancy that 2009 state budget, which will eventually be approved in the state, will enable us to effectively fight economic crisis," he told reporters on Thursday, according to his official web site.

"One can't fight the crisis without basic financial document in the state," he added.

Yushchenko has repeatedly assured Russia and Gazprom that the debts would be paid.

Also, the ruble took another dive as the government allowed further devaluation on Thursday.

The ruble was seen trading at 27.436 to the dollar.

The Russian government bonds due 2030 tacked on 3.625 points to 85.325 bid.

Alliance bank repays '08 debt

Meanwhile in the Commonwealth of Independent States, Kazakhstan's Alliance Bank announced it has paid the entirety of its $1.02 billion foreign debt obligations for 2008, according to a statement.

It also called its $569 million and $537 million due in 2009 and 2019 "quite comfortable and manageable," the statement said.

In keeping with recent statements from other Kazakh banks, it said it will not seek a debt restructuring.

Despite the reluctance of the banks to restructure, the country's sovereign wealth fund SamrukKazyna has suggested some of the banks may refinance.

In trading, there was "nothing of note" for the Kazakh banks, a London-based trader said.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.