Emerging markets end week flat; Venezuela hurt by headlines; Huaneng prices 4 billion yuan

By Aaron Hochman-Zimmerman

New York, May 9 - Emerging markets quietly finished a week highlighted by primary market feeding frenzies on Wednesday and Thursday.

The pipeline nearly froze up on Friday as it was deprived of its aggressive sentiment and positive equity leadership. Only a local-currency deal from China's Huaneng Power International Inc. priced.

In trading, "prices were mostly unchanged," although "spreads were wider on lower Treasury yields," a strategist said.

Venezuela was the hardest hit on Friday as investors saw headlines accusing president Hugo Chavez of arming the Revolutionary Armed Forces of Colombia (FARC).

The benchmark bonds due 2027 were lower by 1 point.

"Vene was the big underperformer," a strategist said.

However, "I'm surprised that that's being treated as news," he said about a possible connection between Chavez and the FARC.

Looking ahead, emerging market credit will continue to perform well, but the recent tightening trend may ease, a market source said.

Inflation, which has damaged the currency trade, will begin to take a larger toll on credits, the source said.

Meanwhile, the equity tumble nudged volatility higher by only 0.01 to end at 19.41, according to the VIX index. The index is a commonly used measure of market volatility.

Treasuries picked up ground as emerging markets were pushed wider by 4 basis points to a spread of 266 bps, according to JPMorgan's EMBI+ index. The EMBI+ determines the amount of extra yield investors will require to keep assets in emerging markets debt.

The EMBI global diversified index, which represents sovereigns and quasi-sovereigns, was wider by 4 bps with a spread of 294 bps.

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

LatAm, Venezuela weaker

"It was a dead day in the market; if anything, it was pretty soft," a syndicate desk official said about Latin America.

Issues were an average of 10 bps wider. "CDX took it on the chin today," he said.

Brazil's highly watched 11% bonds due 2040 "were up about a nickel" to 136.55 bid; "everything else was down," he said.

In Venezuela, a report in the Wall Street Journal alleged tighter connections between Hugo Chavez and the FARC rebel group in Colombia.

Chavez defended the group's interests after the Colombian military launched a strike across Ecuador's boarder killing the group's second in command on March 1.

Information recovered from the FARC seems to indicate that Chavez was supplying the FARC with rocket propelled grenades and surface-to-air missiles.

Investors had been ignoring the story, but it may serve to weaken Venezuela's credits, a market source said.

Also, the Venezuelan finance ministry announced that it received orders for $9.291 billion of its sovereign bonds due 2023 and 2028, more than triple the $3 billion that were originally offered.

Venezuela announced earlier this week that it would issue $4 billion of the bonds on May 7, including $2 billion of the 2023 bonds and $2 billion of the 2028 bonds, both priced at 115.

The coupon on the bonds due May 7, 2023 is 9%, and the coupon on the bonds due May 7, 2028 is 9¼%.

The 9¼% Venezuelan sovereign bonds due 2027 lost 1 point to 88.75 bid, 89.75 offered as spreads moved out by 13 bps.

The 7 3/8% Colombian bonds due 2017 slipped 0.15 point to 112.55 bid.

Elsewhere in Bolivia, a confidence referendum will be held for president Evo Morales within 90 days.

Morales, whose term expires in 2011, suggested the referendum.

The conflict between the resource-rich eastern provinces and the poorer western provinces came to a head recently with an unofficial May 4 vote for secession by the Santa Cruz region.

"I don't have time to worry about him," the syndicate official said about Morales.

No progress in farm crisis

In Argentina, farmers protested along the sides of highways and in some cases blocked roads, despite promises not to cause food shortages, the Buenos Aires Herald reported.

"This is crazy. It's a hugely irresponsible decision that makes no sense at all. It's just about defending the interests of one sector and not about the general interest," said interior minister Florencio Randazzo in the report.

The 8.28% Argentine discount bonds due 2033 was unchanged at 80.5 bid.

Considering its labor trouble, Argentina holding its ground can be thought of as a victory, a strategist said.

Emerging Europe steps back

Meanwhile, trading in emerging Europe was flat to weaker with markets closed in Russia for Victory Day celebrating the end of World War II.

For the first time since the fall of the Soviet Union, tanks and intercontinental ballistic missile launchers were paraded through the streets of Moscow as new president Dmitry Medvedev reviewed his troops.

Over the course of the last week Russia's credits were the outperformers, a market source said.

Even the finance sector improved as it awaits the arrival of the new issues, which have been mounting up on the calendar, the source said.

The Russian government bonds due 2030 added 0.125 point to 115.375 bid.

Meanwhile in Ukraine, a recent report from the national oil company Naftogaz Ukrainy showed a $2.1 billion deficit in 2006 but is now operating at just above a going-concern basis, a market source said.

Factors such as rising commodity costs and political dealings with supplier Russia pushed prices up by 37% and 38% in 2007 and 2008, but the company received $1.9 billion in state subsidies.

Subsidies will continue into 2008 with an 8 billion hryvna package already approved by the parliament.

The source believes that the company may still be able to show progress in the future.

The Ukrainian bonds due 2016 were quoted at 98.5 bid, 99 offered.

In Turkey, president Abdullah Gul approved the higher retirement age of 65 for its workers, up from 58 for women and 60 for men, the Turkish Daily News reported.

The new retirement age will take effect in 2048, but the number of work days to receive a pension was raised to 7,200 from 7,000.

Gul also approved the easing of the restriction on sedition laws.

It is now illegal to insult "the Turkish nation," rather than the more nebulous offense of "insulting Turkishness," the report said.

The sentence, if a person is convicted, was also reduced to two years from three years.

The Turkish sovereigns due 2030 slid 0.45 point to 152.95 bid.

Also in South Africa, the government does not expect the mining industry to be impacted by power losses over the winter.

Despite a nationwide power crisis. which cut production, the lack of supply in the market has helped gold mining firms turn around profit margins after being shut down by blackouts.

Prices flat, spreads wider in Asia

Asian trading held still on the price side, but Treasury action hurt spreads after a quiet overnight session, which also saw some widening.

Some of the corporate names have widened from the tights at the beginning of the week, and the sovereigns may soon follow, a market source said.

In the Philippines, a possible nationalization of the Manila Electric Co. (Meralco) could lower consumer costs but may also drag the private firm into debt like the state-run National Power Corp. (Napocor), the Manila Times reported. Napocor owed $7.1 billion mostly to foreign debt holders by the end of 2007.

Critics said the takeover may spark a rash of nationalizations with companies handed over to friends of powerful government officers, the report said.

On the other hand, "a government that can't even manage traffic or collect garbage properly has no business running Meralco," said former budget secretary Benjamin Diokno.

The Philippine sovereign bonds due 2030 were lower by 0.15 point to 130.5 bid, 131.25 offered.

In Indonesia, the government announced that in 2009 it will begin construction of a $10 billion bridge between the islands of Sumatra and Java, according to the Jakarta Post.

The start date was moved one year ahead of schedule in order to aid the suffering Sumatran economy.

The bridge will be financed almost entirely by the private sector with the government only contributing 5% of the cost. The bridge is expected to be opened in 2025.

The Indonesian government bonds due 2017 were seen unchanged at 101 bid, 102 offered.

Also in Asia, Pakistan has asked the United States not to station the former commanding officer of the Guantanamo Bay military prison facility in Islamabad.

The United States, which sees Pakistan as a vital ally in the war against militancy in neighboring Afghanistan, has made no formal announcements about Maj. Gen. Jay Hood.

Many Islamic fighters are detained in the prison, which has drawn broad criticism for abuses, especially in the Muslim world.

Huaneng prices 4 billion yuan

The primary market was not as fiery as it had been earlier in the week, but China's Huaneng Power International still announced the pricing of 4 billion yuan 10-year bonds at par to yield 5.2%.

Initial guidance was set between 5.1% and 5.4%.

The deal completes an approved 10 billion yuan issuance program.

Huaneng Power is a Beijing-based independent coal power producer.

Also, Brazil's Banco Pine SA announced plans to offer between $100 million and $150 million in June.

The maturity is likely to be near three years for an offer from a regional bank, a market source said.

The Sao Paulo-based bank plans to issue $300 million during 2008.

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