EM debt gets a boost from dip in Treasuries on Europe, Korea anxiety; Venezuela in focus

By Christine Van Dusen

Atlanta, Dec. 20 - Emerging markets sovereign debt saw a small bounce on Monday as Treasury yields dropped amid continued concern about the European debt crisis and escalating tensions between North Korea and South Korea.

"There are some visible bond price markups," a market source said. "The only reason for that is the drop that we've seen over the last two days in U.S. Treasury yields. So we're having a sort of repricing event."

The JPMorgan Emerging Markets Bond Index Plus spread tightened about 11 basis points, with Argentina tighter by 40 bps. Venezuela bucked the trend, widening by 24 bps on several negative headlines.

"It's tracking U.S. Treasuries," said Enrique Alvarez, debt strategist with think tank IDEAglobal. "That's standard practice at this point in the year. I think unless you get a really unexpected event out of Europe between now and the end of the year, this is going to be pretty much the game plan."

Brazil strengthens

He pointed to the Brazil 2034 bonds as illustrative of current market conditions. The bonds priced at 140 and at the start of December were seen at about 1391/2, he said. By mid-market on Friday, that had fallen to 130.

"So you're looking at a drop," he said. "Now that bond is coming back. It's at 123 bid, so it's up a little bit, about 1.5%, on the bounceback."

That's pretty typical of what was seen across the curve for most of the core credits, he said.

"I'm referring to Brazil, Mexico, Colombia and Peru," he said.

Venezuela falters

Venezuela and Argentina, however, were - as usual - a different story. Venezuela was weaker following the congress' decision to grant president Hugo Chavez the power to rule by decree, a move that some opponents believe puts Venezuela on a course toward dictatorship.

"The markets don't like that," a market source said, "so Venezuela is off about 2%."

Also impacting the Venezuelan picture on Monday were the day's meetings between U.S. and Venezuelan officials about the plan to appoint Larry Palmer as U.S. ambassador to Caracas. Venezuela opposes his appointment due to his comments about the sovereign's alleged ties to Colombian guerillas, and Chavez has said he will block Palmer from entering the country.

Court rules against Venezuela

Another factor for Venezuela: The U.S. Sixth Circuit Court of Appeals ruled against the government in a case against Ohio-based investment group Skye Ventures. According to a report from RBC Capital Markets, Sky Ventures had purchased $100 million government-guaranteed, zero-coupon bearer bonds issued by a now-defunct government-sponsored financing institution.

When Skye Ventures tried to redeem the bonds in 2005, Venezuela's new attorney general deemed the bonds fraudulent and not guaranteed by the government.

"A five-year-long court battle ensued, and this last verdict appears to mark an end to the litigation," RBC said. "The current value of Skye's bonds is now reportedly worth $800 million to $1 billion, while the total potential liability could be somewhere in the $6 billion to $9 billion range."

Now it's just a matter of "which Venezuelan assets are potentially attachable in the U.S., assuming president Chavez refuses to pay," RBC said. "[This issue] may hold back Venezuelan bonds until it is clearer how the Venezuelan government will react and the scale of contingent liability that it faces."

Argentina, meanwhile, was up about 1.5%, Alvarez said. "They're the strongest within the market," he said. "They're the only high-beta story out there with any yield attached and that doesn't at this point have swings in sentiment and politics."

Latvia could do a deal

The primary market was quiet, with just a few whispers about a possible issue of notes in 2011 from Latvia, which recently saw its Standard & Poor's rating raised to BB+ and is expecting to move up another notch.

And trading volumes were thin as the markets began the holiday-related wind-down.

"Due to the time of the year, in the morning you get dwindling volumes and markups or markdowns according to what U.S. Treasuries are doing and then you get a flat line trading environment later in the day," a source said.

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