Emerging markets slow, but add to gains; Brazil prices $750 million retap; spreads shrink

By Aaron Hochman-Zimmerman

New York, May 7 - Emerging markets posted another strong session even as some investors saw a chance to take profits.

"We've come a long way back; it makes sense that we get a little bit of a pause and breather," a trader said.

Still, within the context of the week, emerging markets have been a juggernaut.

"What problem?" asked the trader about the global economy.

Obviously real questions remain and "correct timing for a short position is virtually impossible," he said.

In trading, "all of the lower-rated high-yielding credits are doing well," a strategist said. "It's amazing."

Argentina tacked on another 2 points to its discount bonds due 2033.

On the primary side, Brazil priced a $750 million reopening of its 5 7/8% bonds in line with talk in the 5.8% yield area.

Also, the strategist noted that the Brazil 2040 bonds traded at a yield of 6.1% in June 2007 and now trade at a yield of 5.1%, in a "far less certain credit environment."

Investors believe the credit has a long way to climb, he said.

Meanwhile, emerging markets registered a fourth consecutive week of inflows, which amounts to the category's best streak in nearly a year, according to an EPFR Global news release.

On Thursday, equities underwent a correction as volatility increased by 0.99 to close at 33.44, according to the VIX index. The index is a common measure of market volatility.

As Treasuries sold off, emerging markets tightened by 19 basis points to a spread of 464 bps, according to JPMorgan's EMBI+ index. The EMBI+ determines the amount of extra yield investors will demand to hold assets in emerging market debt.

The EMBI global diversified index, which represents sovereigns and quasi-sovereigns, was tighter by 20 bps with a spread of 498 bps.

The diversified index has a less strict liquidity rule for inclusion.

Emerging Europe 'still in buyfest'

Little changed in emerging Europe throughout the week, a trader said.

"We're still in a buyfest," he said, adding this spring "risk is back in vogue."

No one credit stood out, he said, although with few sellers "it's been as vicious on the way up as it was on the way down, which we knew it would be."

"From my stuff," which mostly includes the former Soviet Union, "bonds that were in the mid-50s and no one would touch are now in the mid-70s and still look cheap," he said.

Elsewhere, on the primary side, Croatia plans to issue a €750 million bond during the week of May 11, according to a market source.

BNP Paribas, Deutsche Bank and Unicredit will act as bookrunners for the offering.

Other names that have been discussed in the primary market are Bahrain, Poland, Romania, Slovakia and South Africa.

Meanwhile in trading Russia's bonds were "pretty volatile" but added 3/8 point to 100 1/8 bid, 100¼ offered.

Also in the category, Ukraine's sovereign bonds due 2016 were quoted at 67 bid, 70 offered, while Turkey's bonds due 2030 were seen at 149¼ bid, 149¾ offered.

Brazil retaps '19s

Brazil priced an upsized $750 million reopening of its 5 7/8% bonds due 2019 at 100.539 to yield 5.8% with a spread of Treasuries plus 252 bps (Ba1/BBB-/BBB-).

The original announcement offered guidance in the 5 7/8% area at an amount of $500 million. Guidance was later revised to 5.8%.

Brazil also reserved its rights to increase the size of the transaction by as much as 5% during the Asian overnight session on May 8.

Barclays and Citigroup acted as bookrunners for the registered deal.

The original bonds priced on Jan. 7, 2009 at a price 98.135 to yield 6.127%, or Treasuries plus 370 bps.

Also, the 11% government bonds due 2040 slipped ½ point to 131 bid, 131.1 offered.

LatAm high-betas better

Latin America cooled its rally pace but still found places to improve on Thursday.

In Argentina, bonds were up as many expected the government to take advantage of low price levels to buy back debt before a continuing rally puts them out of reach, the Buenos Aires Herald reported.

The 8.23% Argentine discount bonds due 2033 added another 2 points to 38 bid, 39¾ offered.

In Venezuela, the government finally settled payment for the seizure of steelmaker Sidor with Luxembourg's Ternium SA for $1.97 billion, according to a statement.

Ternium transferred the title of its 59.7% controlling interest in Sidor, even though Caracas has controlled the company since July 12, 2008, the Ternium statement said.

The 9¼% sovereigns due 2027 inched up ¼ point to 68½ bid, 68¾ offered.

Asia pushes higher

Asia continued to improve, if at a slower pace on Thursday, while spreads were ratcheted tighter by falling Treasuries.

Meanwhile in the Philippines, gross international reserves added $424 million in April and hit $39.5 billion by the end of the month, according to the central bank.

The figures were hampered by debt repayments, but losses were outweighed by the foreign exchange operations of the bank and foreign investments, the bank statement said.

The peso was seen trading at 47.475 to the dollar.

Indonesia's fast-climbing bonds due 2019 reversed course and fell by ½ point to 126½ bid, 128½ offered.

Also in Asia, Pakistan prime minister Yusuf Raza Gilani announced that he has ordered the army to "eliminate militants and terrorists" after meeting with U.S. president Barack Obama and Afghanistan president Hamid Karzai.

"In order to restore honor and dignity of our homeland, and to protect people, the armed forces have been called to eliminate the militants and terrorists," Gilani said.

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