Emerging markets underperform equities; Venezuela slides; Mexico eyes Samurai offering

By Paul A. Harris

Portland, Ore. Aug. 23 - Emerging markets debt took a back seat to equities, which rallied substantially on Tuesday, market sources said.

"Sovereigns are not performing well, and there is no bid for high-yield names," said an EM portfolio manager.

This investor spotted the J.P. Morgan Emerging Markets Bond Index, EMBI Global, at 373 basis points bid heading into the New York afternoon, 2 bps wider on the day. Meanwhile the S&P 500 stock index shot 3.4% higher during the session.

The sovereign bonds of Venezuela continued their slide on Tuesday. Political uncertainty is creating that slide, according to the investor, who said that Venezuela's dollar-denominated 9¼% bonds due in 2027 were 67½ bid, 68¼ offered, down ¾ of a point on the day.

Adding to pressure on Venezuela's debt is a buzz in the market that a faction of the Venezuelan army is becoming restive about the political uncertainties surrounding the election plans and/or possible succession of that nation's cancer-stricken, iconoclastic president Hugo Chavez.

And in an ultra-quiet primary market, Mexico is meeting with Japanese investors ahead of possible Samurai deal which would represent Mexico's second pass at the yen-denominated market in a year.

Venezuela debt weakens

Venezuelan debt continued to sell off on Tuesday, sources said.

Venezuela's dollar-denominated 9¼% bonds due in 2027 were 67½ bid, 68¼ offered heading into the New York afternoon, down ¾ of a point on the day.

On Friday Standard & Poor's in part cited political uncertainty in Venezuela as it downgraded Venezuela's long-term foreign and local currency sovereign ratings to B+ from BB-.

Much of that uncertainty revolves around the health and political plans of Venezuelan president Chavez, according to an emerging markets portfolio manager.

Chavez, who has served as president for 12 years, returned to Venezuela last week following a second round of chemotherapy in Cuba. Chavez, who is being treated for colon cancer, previously underwent surgery to remove a tumor from his colon.

Investors are concerned about a possible power vacuum should Chavez perish or be forced to relinquish power due to his deteriorating health, the manager said.

Intensifying investor apprehensions surrounding the political situation is a buzz in the market that a faction of the Venezuelan army has grown restive over the political situation.

Chavez, who was first elected in 1998, is due to stand election again in 2012. Opposition to his administration began gaining traction in 2010 when drought forced Venezuela to implement strict rationing of its electricity, much of it derived from hydroelectric sources.

The rationing served to hamstring Venezuela's economic recovery, Chavez's opponents say.

Market awaits Bernanke

Apart from the Venezuela situation, liquidity in emerging markets debt remained very low on Tuesday, sources said.

Brazil's benchmark bonds due 2040 were flat on the day, at 137½ bid, 138 ¼ offered, according to a market source.

There is no calendar now, and whether or not one will take shape in September remains an open question, a fund manager said.

On Tuesday investment-grade emerging market bonds continued to hold in better than their high-yield counterparts, sources said.

In the Russian space, for example, OAO Novatek's investment-grade 6.604% loan participation notes due 2021 were ¼ point higher at 104 bid, according to a source in Europe. Meanwhile speculative-grade bonds of Promsvyazbank were generally ¼ point lower, the source added.

The market seems to have its sights set on a scheduled Friday statement from Ben Bernanke, chairman of the Federal Reserve Bank, an investor said.

"Personally I don't see what he can do that will make a difference," the buysider added, noting that the Fed Funds rate is already hovering just above the balk line, between 0% and 0.25%. And should Bernanke change his mind and come forward with a new round of stimulus he will face loud criticism from the Republican-controlled U.S. House of Representatives, where the "austerity"-drum is being beaten loudly.

Also, investor's appetites for bailouts may at long last be diminishing, the buysider said.

Mexico ponders Samurai deal

The primary market remained becalmed on Tuesday.

Mexico (Baa1/BBB/BBB) is meeting with Japanese investors ahead of a possible Samurai bond deal, according to a market source.

Citigroup, Mitsubishi and Nomura are leading the non-deal roadshow set to run during the present week.

Should a deal materialize it would be Mexico's second pass at the Samurai market in less than a year. Mexico priced a ¥150 billion issue of 1.51% notes on Oct. 28, 2010.

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