Emerging markets rebounds from early dip as stocks jump; Turkey lower; primary takes a personal day

By Paul Deckelman and Aaron Hochman-Zimmerman

New York, Aug. 29 - Emerging market bonds were initially seen lower on Wednesday but then rebounded as stocks soared, although volume was low as the upcoming holiday looms.

Meanwhile the primary was quiet.

Emerging markets started off on a weak note, as Asian trading rode the negative momentum which had been generated during Tuesday's session, when Latin American bonds were in retreat in line with U.S. equities following the latest bearish news about the American housing market and consumer confidence.

Turkish bonds were also easier Wednesday, influenced by both global credit concerns and domestic political worries following the selection for the first time in the country's history of a president with roots in Islamic politics.

But with U.S. stocks surging Wednesday on expectations that the Federal Reserve may cut key interest rates at its Sept. 18 meeting - or perhaps even sooner - other relatively risky asset classes, including global equities, junk bonds and emerging markets debt, stepped out from the safety of U.S. Treasuries to participate in the rebound, although trading in these vehicles was thin in the U.S. ahead of the upcoming Labor Day holiday break at the end of the week.

With Latin American bonds rising, Argentina was seen leading the way, while among the lower beta names, Brazil's debt was firmer. Colombia remained on the downside, however. South Africa's debt fell after unfavorable inflation statistics.

Spreads shrink

Spurred on by hopes of an interest rate cut and buoyed by strong earnings that sparked a rally in the tech names, Wall Street was up across the board, with the bellwether Dow Jones Industrial Average jumping 247.44 points, or 1.90%, to end at 13,293.44, recovering almost all of the 280 points it had surrendered on Tuesday amid pessimism about the Fed's intentions. Meanwhile, the broader stock gauges did even better, with the S&P 500 and the Nasdaq Composite each up more than 2% on the day.

With people eschewing the safety of U.S. government paper for a little taste of risk, Treasuries were mostly lower on the session. While three-month bill yields dropped by 31 basis points to 4.01% after a London-based fund manager indicated it may be forced to sell assets backing a $6 billion commercial paper program, longer-dated paper moved the opposite way. The yield on the current two-year note rose 10 bps to 4.18%, while the yield on the benchmark 10-year issue, after first dropping as low as 4.48%, the lowest level seen since mid-March, moved back upward by 7 bps, to 4.57% at day's end.

Combined with a generally firmer picture for most emerging bonds, their average spread over Treasuries narrowed solidly. The key measure of investor risk tolerance or risk aversion, as tracked by the widely followed JP Morgan & Co. EMBI+ index, tightened by 8 bps to 226 bps. While it remains below the spreads in the 250 bps-plus range seen at the height of the market's credit crunch-induced turmoil earlier this month, the EMBI+ still stands some 75 bps wider than its historic lows, seen at the beginning of summer.

A trader in Latin American issues exclaimed that his market was doing "very well today, as stocks were up big."

Another trader, however, took a less enthusiastic view of Wednesday's goings on, responding "not really," when asked when anything was happening in his area, also Latin American paper, and adding that he saw "a surprising malaise in EM corporate issues in the face of this big rally back in U.S. equities."

He saw levels "pretty much sticking to this morning's levels - better than [Tuesday's] close but well off [Tuesday's] earlier highs."

Yet another trader summed up the whole situation by characterizing the market as "pretty darn quiet."

Argentina, Venezuela lead the way

As is usually the case when EM moves solidly up or down, one of the volatile high-beta credits - generally Argentina - leads the way, and Wednesday was no exception to that rule of thumb.

The country's benchmark dollar-denominated 8.28% bonds due 2023 were seen up more than 2 points on the session, quoted at the 84.5 bid level.

Another member of that high-risk club, Venezuela, was also seen on the upside on Wednesday, its global 9¼% bonds due 2027 seen better by a point to around the 99 area.

Brazil up, Colombia off

Among the more steady Latin names with less volatility, Brazil's 11% globals due 2040 were seen up ¾ point, around the 132.50 neighborhood. Brazil's 7 7/8% global bonds due 2015 were up nearly ½ point to the 111.625 area, while its real-denominated bonds were also higher.

One Latin name seen lower, on the other hand, for a second straight session, was Colombia, in line with a decline in that country's currency unit, the peso, which hit its weakest level against the dollar since early April. At the close, $1 bought 2,166.5 pesos, versus 2,147.2 on Tuesday.

Accordingly, as investors sold Colombian assets, the price on the Colombian benchmark 11% peso-denominated bonds due 2020 bond rose to 10.71% from 10.627% on Tuesday.

Outside of Latin America, Russia's global paper due 2028 was seen by a market source to have gained about 1/3 point on the session.

Inflation takes toll on South Africa

South African bonds weakened by almost as much as 10 basis points after disappointing consumer inflation data for July which has raised expectations of another interest rate hike. The core consumer price index, excluding mortgage rate changes, was up 6.5% year on year in July versus the 6.4% rise seen in June, while month on month the inflation gauge rose 1.1% in July, more than double the 0.5% increase seen the month before.

That caused the yield on the key government R153 bond due 2010 to rise as high as 9.190% from its previous close of 9.120%, although the bond firmed off its lows later in the day to close at a yield of 9.170%. Its short-term R196 bond's bid yield widened out to 9.450% before finally closing at 9.435%, still well up from its previous close of 9.375%. The longer-term R157 bond due 2015 widened out to 8.470%, although it recouped some lost ground and closed at 8.460%, versus 8.415% on Tuesday.

Turkey off as new president moves in

In Turkey, heading into Thursday's market holiday, bonds weakened in the continued aftermath of Tuesday's vote in Parliament making Abdullah Gul the new president.

The yield on the country's lira-denominated benchmark bonds due 2009, which on Tuesday had moved up to 18.38% from 18.26% the day before, continued to rise Wednesday, to 18.46%. However, the retrenchment may have run its course, with the paper seen trading back down at 18.38% percent in Friday-dated trades.

The benchmark dollar-denominated bonds gained about ¼ point to 151.25 bid, while its yield declined around 2 bps to 7.22%. However, the price of a credit default swaps contract hedging against the possible default were seen having widened out by between 5 and 8 bps. In other Turkish markets, the lira meantime eased slightly on world foreign exchanges, while stocks rebounded from early weakness and took their cue from stronger European bourses, moving up in late trading.

Besides the political noise revolving around the presidential selection, the country's markets were seen responding to global credit concerns, which had roiled the local markets earlier in Asia.

The selection of Gul, who got his start in politics with Islamic-oriented factions, has unsettled the uneasy balance in Turkey between its historically powerful secularists, including the armed forces, and the growing portion of the population that identifies itself as Islamic in orientation. Gul's election to the presidency was a foregone conclusion, since his AK Party dominates the Turkish political scene - but that didn't stop the country's military from issuing a bluntly-worded statement in advance of Tuesday's parliamentary vote, warning that efforts were being made to undermine Turkey's secularism. The new Turkish government moved on with its business, though, on Wednesday, as prime minister Recep Tayyip Erdogan gave the newly installed president Gul the list of his proposed cabinet members, which Gul approved and sent on to Parliament.

Turkish debt investors meantime got some good news from Standard & Poor's, which affirmed Turkey's BB- long-term and B short-term foreign-currency and its BB long-term and B short-term local-currency sovereign credit ratings, as well as the BB- foreign currency ratings for the government-owned Export Credit Bank of Turkey, with a stable outlook.

The agency cited the considerable progress the country's banking and financial system has made since the financial crises in 2001 and 2002. It also noted Ankara's "independent and credible" central bank charged with safeguarding monetary stability, and improved confidence in economic policy-making.

Asia weaker after Tuesday rout

Earlier Wednesday in Asia, bonds were weaker, in line with the weaker close in the EM markets and U.S. equities on Tuesday, considered the overnight period in the Far East.

The benchmark Philippine government sovereign issue due 2031 were quoted as having eased to 105.5 bid, 105.875 offered, while its 2032 bonds were also seen off slightly to 95.375 bid, 95.75 offered. The cost of a CDS contract linked to those bonds was seen having risen 10 bps to around the 195 bps level.

Looking ahead

Another quiet day in the primary market gave participants another chance to wonder how much the market will move in the next few weeks, and in which direction.

"I think it's difficult to judge," said an emerging markets syndicate official who specializes in emerging Europe and the Middle East.

There are still many factors at play and the extent of the subprime crisis is still to be determined.

"I guess we will just have to wait and see," the syndicate official said, adding "it would be nice to see the markets open for EM again."

The volatility continues to plague the emerging markets although the VIX index managed to drop down to 23.56 on Wednesday.

There are limited, but noticeable signs that the Federal Reserve Bank's lowering of the discount loan rate provided some stability to the market, a market source said.

Since the rate cut of August 17 a daily average of $1.2 billion was borrowed through the discount window, the source said.

Further, the economic reports released after the Fed's action have been better than expected. Reports on retail sales, industrial productions, new and existing home sales, have all been pleasant surprises, a market source said.

Asia not immune

Recent sell-offs in the Asian markets indicate that they are not as impervious to the U.S. subprime peril as had been expected or hoped, a market source said.

Economies in Asia have been growing slowly enough to prevent wild inflation, but there are concerns, the source said.

The pressure of inflation has shown itself and central banks have been raising interest rates to maintain control, the source added.

However, Asian corporates particularly in China and Indonesia, are maintaining high levels of liquidity. The liquidity should give them enough of a buffer if troubles continue, the source said, adding that they remain relatively safe bets.

Another source added Asian coal companies to the list of attractive investments.

Maxcom able to price on schedule

Mexico's Maxcom Telecomunicaciones SA de CV priced a $25 million add on to its 11% senior notes (B3/B) due Dec. 15, 2014 at 103 to yield 10.24.

The deal priced Tuesday on its talk in the 103 area.

Morgan Stanley acted as bookrunner for the Regulation S and Rule 144A deal.

The notes will not be fungible for 40 days after pricing or until liens are perfected. If the liens are not perfected by Nov. 1, 2007 the coupon steps up 25 basis points.

The add on brings the total issue to a value of $200 million.

Proceeds will be used for capital expenditures and general corporate purposes as well as the refinancing of debt.

Maxcom is a "last-mile" telecommunications firm is based in Mexico City.

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