Emerging markets tightens with equity rally; high-betas jump; primary quiets down

By Aaron Hochman-Zimmerman

New York, Dec. 6 - Emerging markets continued in the positive direction of the last few sessions, but investors were hesitant about expressing too much emotion with Christmas so close on the calendar.

Prices were higher, but weaker Treasuries provided most of the impetus for the spread tightening during Thursday's session.

The high-betas showed the biggest of the day's gains.

Argentina's discount bonds due 2033 tacked on 1.75, while Venezuela's sovereigns due 2027 added 1.5.

Only echoes of Gabon's $1 billion sovereign were heard in the primary, despite predictions that other issuers may have been encouraged to follow the African nation's lead.

Meanwhile, in order to deal with the ever-present subprime crisis, president George Bush announced preliminary terms of the deal which Treasury secretary Henry Paulson struck with representatives of the subprime lenders and the major banking houses.

The deal contains many conditions, but for approximately two million borrowers adjustable interest rates will be frozen for five years.

Some market watchers are distrustful of the agreement's ability to have a great effect on the banking sector, others have speculated that it will ensure a smaller 25 basis point cut to interest rates from the Federal Reserve Board on Tuesday.

"We had 25 [bps] from the start and really haven't switched around much," said Enrique Alvarez a Latin America debt strategist at think tank IDEAglobal.

"I don't think that has much impact," he said.

"If they're trying to jar sentiment, they're going to have to do something more," he said.

If the market has had greater influence over chairman Ben Bernanke's decisions before, "it's a political issue now," Alvarez said.

"It's not a Greenspan put; now it's a Bernanke-Paulson put," he said.

Still, the final piece of the rate cut equation will be Friday's payroll numbers, a trader said.

The strength shown by equities whittled away at volatility numbers throughout the day, according to the VIX index, which lost 1.57 to close at 20.96. The index is the common yardstick of market volatility.

Conversely to the U.S. Treasuries, emerging markets tightened 14 bps to a spread of 236 bps, according to JP Morgan's EMBI+ index. The index measures the amount of extra yield investors require to hold emerging markets debt.

Sovereigns lead emerging Europe higher

Despite the announcement of a $2.6 billion writedown from the Royal Bank of Scotland, emerging Europe looked better on light trading.

"Spreads are tighter today," a trader said, although "I don't see much volume."

There is "not much out there," a syndicate desk official said.

As more light is shed on the deal between secretary Paulson and the subprime lenders "it looks like equities will be better," the trader said.

The Republic of Gabon's $1 billion issue due 2017, which priced at par on Wednesday, traded up in the area of 102 bid.

"It goes into the EMBI index," he said, "every fund manager has to be in these bonds."

Gabon's issue is likely to perform similarly to Ghana's bonds also due 2017, which were seen at a bid of 104. Ghana priced $750 million of 10-year 8½% notes at par on Sept. 27.

In Russia, inflation is likely to be near to 12% for the month of December, according to a market source.

Consumer prices for November were up 1.2% which was ahead of the 0.8% to 0.9% which had been forecast by the Russian statistics office. That figure raised the year-over-year inflation rate to 11.4%, mostly due to high food prices, the source said.

The Russian sovereigns due 2030 were spotted up 0.25 at a bid of 114.25.

Also, the 38% increase in oil prices in the Ukraine was not entirely accounted for in the country's 2008 budget, the source said.

The Ukrainian government will receive some revenue from a tax on the oil which flows through the Ukraine on its way to Europe, but that will be counterweighted by a tax the Ukraine pays to ship gas through Russia to Asian buyers.

In Turkey, Calik Holding AS announced a $1 billion bid for the nation's second largest media outlet, Sabah-ATV.

Calik is currently the only bidder and has drawn criticism over an alleged conflict of interest relating to the possible acquisition. One of the general managers of the group is prime minister Recep Tayyip Erdogan's son-in-law, the Turkish Daily News reported.

Turkey's benchmark bonds due 2030 were seen flat at a bid of 158.

High-betas stronger as LatAm tightens

Latin American trading clawed its way higher in thin volumes during Thursday's session.

Prices were up slightly throughout the sector, but most of the progress came on the spread side as yields were up in the U.S. Treasury market.

"I think there was very thin action, a little more risk absorption ... Argentina is the one that has been bid up," IDEAglobal's Alvarez said.

Argentina's high-beta discount bonds rode the upturn to the tune of 1.75. The bonds were quoted at 97.8 bid, 98.75 offered.

"That's the only noteworthy thing," he said.

Venezuela's benchmark issue rifled up at the beginning of the week after a referendum loss for president Hugo Chavez, who surprised many critics by taking his loss in stride.

He called the 'no' vote on the reforms which would end his term limits and expand his powers over industry and finance a "decision the people have made."

Many market watchers expected a lashing out from the vocal leader, but did not hear one until he appeared on television Wednesday night to call his detractors' win a "s**t victory."

The Venezuelan 9.25% sovereign due 2027 was seen up 1.5 to a bid of 100.75.

The bonds were pushed up by the recovery in oil and the rally in the Dow Jones Industrial Average, Alvarez said.

In Brazil, industrial production was up by 10.3% year-over-year in October, higher than the predicted 8.9%.

Still, the central bank is concerned about inflation and left interest rates at 11.25%.

The real was seen trading at 1.768.

Brazil's government bonds due 2037 were up 0.45 to trade around 114.45 bid, 114.9 offered.

The highly watched 11% bonds due 2040 were seen at a bid of 134.5.

Asia rallies on Fed cut speculation

Asian credits performed well based on the assumption that the Fed will provide the market with a 50 bps cut, a trader said.

"It's all based on the Fed going 50 [bps]," he said.

With anything less "the market's going to tank," he said.

Still, the tone around the trading desks was much improved as Thursday was "the first time we've seen a rally for two or three days in a row in a while," he said.

In the Philippines, as the peso continued on its seven-year high against the weak dollar, the government announced it may have a budget surplus for the month of November.

The PHP 47 billion from the sale of the government's 60% stake in the National Oil Co.-Energy Development Corp. will provide the surplus, according to a report in the Manila Times.

The peso was seen flat at 41.83 against the dollar.

The Philippines' government bonds due 2030 were up 1 point to a bid of 135.375.

Both the Philippines' and Indonesia's CDS tightened by approximately 5 bps to close at 149 bps to 151 bps.

The Indonesian bonds due 2017 were up 0.625 to trade at a bid of 104.125.

Investors are watching Pakistan to see if president Pervez Musharraf will keep his promise to lift the state of emergency on Dec. 16.

If the constitution is restored as planned, the country's bonds can expect a "sharp rally," the trader said.

In trading Thursday, the Pakistani sovereigns bonds due 2017 climbed 0.5 to 98.5 bid, 91.5 offered.

Primary waits for last-minute issuers

Even though Gabon provided an example with its $1 billion priced on Wednesday, no issuers surfaced to follow the lead. Some in the market had hoped it would encourage others to bring new deals.

For the foreseeable future, "I don't think we'll see a big EM issue aside from sovereigns," a trader said.

Short-term paper is a possibility, he said, but nothing from a corporate with a maturity over five or 10 years, he said.

"There are only a few days to go, then the end of the year," he said.

"The next year will start heavily with all of the Kazakhstan banks," he said.

"They've been avoiding it for the last month," he said about the banks' reluctance to offer new paper.

They are getting to the point where "they must come to market," he said.

"Looking at some of the new issues ... it appears that some issuers are struggling to raise the amount originally planned," a syndicate official said.

"As Christmas draws closer, I suspect they will hold out and wait for the new year," the official said.

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