Emerging markets battle swine flu; Mexico bonds outperform peso; emerging Europe eyes bonds

By Aaron Hochman-Zimmerman

New York, April 27 - Emerging markets were besieged on Monday with news, rumor and conjecture about the swine flu virus, which is believed to have killed more than 100 people in Mexico.

By the market's close in New York, the World Health Organization had already categorized the virus as a level 4 health emergency. A grade of 6 is considered a full pandemic.

On the financial side, investors feared the virus may cause slowdowns or stoppages across almost every business sector as swine flu has been found across Europe, the Americas and as far away as New Zealand. Concerns for the tourism and agriculture sectors in Mexico were particularly strong.

Credit traders braced themselves for sinking levels and widening spreads, but most of the damages seemed to have the greatest effect on the equity and currency markets.

Stocks in the United States ended lower, which helped spur volatility up by 1.50 to 38.32, according to the VIX index. The index is an often used gauge of market volatility.

As a sector, emerging markets widened 19 basis points to a spread of 564 bps, according to JPMorgan's EMBI+ index. The EMBI+ calculates the amount of extra yield investors will demand to hold assets in emerging market debt.

LatAm fights swine flu

"If I hear one more story about the swine flu..." a buysider said, as the news of the virus dominated the market on Monday.

In Mexico, "most of the sell-off came in the equities and currency," the buysider said.

Even the peso held on for much of the day before breaking the 14 pesos to the dollar level.

The foreign debt was wider by nearly 17 bps, but that was largely in line with the rest of the category, the buysider said.

Local markets felt "a relatively small reaction" and mostly in the 10-year piece of the curve, which suggests "the central bank is going to cut more aggressively," the buysider added.

The peso was seen trading at 13.945 to the dollar.

The 5 7/8% Mexican bonds due 2014 were quoted at 104¼ bid.

The virus and fears of its spread were at their most severe in Mexico, but in Brazil the meat processing sector was also weighed down.

The JBS USA LLC 11 5/8% bonds, which priced on April 22 at 95.046, fell 1½ points to 93½ bid, 94½ offered.

Also in Ecuador, president Rafael Correa celebrated receiving 49% of the vote in a straw poll indicating a 20-point lead over the second-place finisher, former president Lucio Gutierrez.

The defaulted 8% Ecuadorian bonds due 2030 were spotted at 30½ bid, 33½ offered.

Poland, Russia in need

In emerging Europe growing budget deficits forced government officials to consider how they will fill gaps in their balance sheets in the coming years.

One market source heard rumors that Poland wants to raise $1 billion by end of June, but it was unclear if they would attempt to draw off of the debt market or make an appeal to the World Bank or International Monetary Fund.

In Russia, finance minister Alexei Kudrin believes the risk of inflation outpacing the 13% projection is "minimal," reports said.

Kudrin added that Russia will not seek to raise money in international markets in 2009, but he left the possibility open for 2010.

In 2010, Kudrin confirmed that the government may issue $5 billion or more in eurobonds.

Kudrin said later that the government may also seek the money it needs from the IMF.

The Russian government bonds due 2030 added ½ point to 96 3/8 bid.

In Ukraine, prime minister Yulia Timoshenko plans to ask Russia prime minister Vladimir Putin to reconstruct the terms of Kiev's gas import contract.

Timoshenko believes that Ukraine is bound by the current agreement to purchase more gas than it can afford; however, "I am sure that the consumption plan will be corrected," she said.

Also in Turkey, chatter regarding a deal with the IMF continued after the international lender's managing director, Dominique Strauss-Kahn, suggested the sides would reach an arrangement "within the coming weeks."

Asia drawn wider

Asia held on with mixed levels but with largely widening spreads as Treasuries were seen more attractive amid the flu fears.

Meanwhile, as oil prices were seen as low as $48 per barrel, the energy firm China National Petroleum was thought to be planning to issue $3 billion over the next two months in order to fund acquisitions, a market source said.

Elsewhere in Pakistan, talks between the Taliban leadership and the government in Islamabad have broken down, reports said.

The talks were aimed to settle violence that broke out between government forces and Taliban militants in the area around Buner, near the capital.

Also in the category the Philippines sovereign bonds due 2030 were improved by ½ point to 119¾ bid.

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