Emerging markets higher; Indonesia deal soon; quiet flows ahead of stimulus vote, Treasury auction

By Aaron Hochman-Zimmerman

New York, Feb. 9 - Emerging markets were eerily silent on Monday as investors were reluctant to move many pieces ahead of major events in the United States.

The U.S. government expects to sell $61 billion in 13-week and 26-week Treasuries on Tuesday as well as hold a Senate vote on the latest stimulus bill.

Indonesia was the cause of most of the noise in the emerging world.

A highly anticipated sovereign issue may now arrive on Wednesday at the size of $2 billion, according to one trader.

Trading was calm and only slightly positive, particularly in Latin America, where Venezuela's population will decide on Sunday whether or not to allow president Hugo Chavez to stay long beyond his current term limits.

The bonds due 2027 fell 0.5 point.

Volatility spiked initially with a low open for equities, but numbers tempered as volatility only added 0.27 to end at 43.64, according to the VIX index. The index is a frequently used gauge of market volatility.

As a sector, emerging markets tightened in by 10 basis points to a spread of 615 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.

Asia looks for Indonesia deal

Any action from Asia was largely quelled by an upcoming stimulus vote in the U.S. Senate and a U.S. Treasury auction.

Still, a rumor of the Indonesia deal made for the biggest news in the sector.

"Reportedly, the Indo deal is this week," a trader said. "I heard Wednesday."

The rumor mill churned out the idea that the issue will be $2 billion in five- and 10-year bonds, which "could be manageable," the trader said, but where the spread will fall is anyone's guess.

Another $1.5 billion in supply is expected from Indonesia over the rest of the year.

Previous rumors suggested that a part of the program would include a rupiah-denominated sukuk.

The Indonesian government bonds due 2018 were quoted at 80 bid.

In the Philippines, the government refused all of the bids that were offered during Monday's Treasury bill auction, the Manila Times reported.

The government offered PHP 7 billion in three-, six- and 12-month bills, but the rates investors offered were too high for the Treasury Department.

The Philippine sovereign bonds due 2030 were seen better at 115.25 bid.

Emerging Europe 'hoping'

Emerging Europe was slow to leave the starting line on Monday as volumes were light and the primary was stagnant, a trader said, noting "it's very boring."

"Everybody hopes; nobody knows," he said about the market's direction, particularly as a stimulus from Washington, D.C., may be close at hand.

In Russia, a bill will be submitted to the duma aimed at boosting the sophistication of the Russian financial system.

The bill will create a maximum sentence of seven years in prison for improper use of insider information, said chief of the Federal Service for financial markets, Vladimir Milovidov, according to the Itar-Tass News Agency.

Also in Russia, prime minister Vladimir Putin slammed the credibility of the credit rating agencies after his country suffered a downgrade to BBB from Fitch Ratings on Feb. 4.

"We are interested in the emergence of strong domestic ratings agencies that are better equipped to study the specifics of the Russian markets in their estimates," Putin said, according to reports.

The Russian government bonds due 2030 were quoted at 91.75 bid, 92.25 offered.

Meanwhile, the government of Ukraine asked Russia for a $5 billion loan to cover its operating budget, reports said.

Moscow responded by asking for more information about Ukraine's financial condition before further considering the aid.

The Ukrainian sovereigns due 2016 were seen at 39 bid, 42 offered.

Also in Turkey, the national statistics reporting agency corrected the amount of the drop of December industrial output to 17.6% from 11.9%, the Hurriyet Daily News reported.

The Turkish sovereign bonds due 2030 were spotted at 141 bid, 142.5 offered.

Quiet LatAm reverses course

Latin America saw a quiet Monday session in anticipation of a stimulus vote on Monday night and a major Treasury auction on Tuesday.

"I think with the 10-year sector reaching 305 [bps], people are reversing their positions and putting widening spread trades out there," a strategist said.

"I don't think a lot of the supply has been discounted," he said.

Meanwhile, in Venezuela, protests have sprung up all over the country with, at times, violent consequences.

Many have marched to oppose president Hugo Chavez's attempt to radically change the term limit laws, but pro-Chavez forces have struck back, reports said.

Chavez came close to winning a referendum vote to extend his time in office in 2007 and will make another attempt on Sunday.

The 9¼% Venezuelan government bonds due 2027 slipped 0.5 point to 51.25 bid, 52.5 offered.

A fellow high-beta credit, Argentina added 0.5 point to its discount bonds due 2033.

The bonds traded at 33.75 bid, 34.75 offered.

In Brazil, the 11% bonds due 2040 were seen at 123.75 bid, 124 offered, while Mexico's bonds due 2017 were quoted at 97 bid, 97.5 offered.

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