Emerging markets end week strong; CAF prices $1 billion 10-year bonds; Treasury yields ease

By Aaron Hochman-Zimmerman

New York, May 29 - Emerging markets put the week's difficulties in the past as the category ended with a healthy stride on Friday.

Spreads widened on Treasury action, but levels were broadly better.

"Apart from that one day, the market seems in reasonable shape," a trader said, particularly on the credit side.

There is "good tone" and "ongoing demand," he said.

Emerging markets saw moderate gains on the cash side while spreads were reeled in by soaring U.S. Treasury yields.

The tighter spreads attracted new money into emerging market bond funds for the seventh straight week, according to data compiled by EPFR Global.

However, Treasuries did back up 30 basis points from the highs, but they will be "a major theme going forward," said Enrique Alvarez, a Latin America debt strategist at think tank IDEAglobal.

Right now, "the fast money crowd is in on the Treasury side," he said.

Also in the major markets, volatility figures held still through much of the session but fell off at day's end by 2.75 to 28.92, according to the VIX index. The index is a frequently used yardstick of market volatility.

Treasury yields slipped, which widened emerging markets by 13 basis points to a spread of 459 bps, according to JPMorgan's EMBI+ index. The EMBI+ estimates the amount of extra yield investors will demand to hold assets in emerging market debt.

CAF prints $1 billion

Late Thursday, Corporacion Andina de Fomento priced a $1 billion 10-year senior unsecured bond at 99.825 with a coupon of 8 1/8% to yield 8.151%, or Treasuries plus 450 bps on Thursday (A1/A+/A+), according to a filing with the U.S. Securities and Exchange Commission.

The bonds matched the talk at Treasuries plus 450 bps and drew $3 billion worth of interest.

Credit Suisse and Merrill Lynch acted as bookrunners for the registered deal.

Proceeds from the sale will be used for general corporate purposes.

Corporacion Andina de Fomento is a Caracas, Venezuela-based development lender.

Argentina leads LatAm up

Latin America finished the week on a sharp upward slant led by Argentina.

"They're the big mover," said IDEAglobal's Alvarez.

Two angles put Argentina in a good light, he said.

On the domestic side, Buenos Aires is looking to push forward some interest payments on the Boden 12s, he said, while externally a small number of major dedicated funds' emerging market funds have come out bullish on high-beta.

Among a number of possible high-beta picks, Argentina was the "toss up" winner, Alvarez said, but "in a market like this you want to get where the major players are" and many investors followed.

The 8.28% Argentine discount bonds due 2033 added ¾ point to 41¼ bid, 42½ offered.

In Venezuela, oil's spike to top $66 per barrel has been undercut by president Hugo Chavez.

"Chavez has extracted a lot of the momentum there," Alvarez said, with his nationalizations and requests for aid.

As an oil play, unless oil hits $70 per barrel, "Venezuela is sort of stuck in a range at this point," he said.

The 9¼% Venezuelan sovereign bonds due 2027 added 1 point to 63½ bid, 64¾ offered.

Also, after some speculation that Brazil may bring new 10- and 30-year paper, no progress was noted during the week.

The 7 1/8% Brazilian government bonds due 2019 added 3/8 point to 100½ bid, 100 3/8 offered.

'No screaming' at Ecuador

On Monday, Ecuador announced that it would pay 35 cents to the dollar for its defaulted bonds due 2012 and 2030, and "what's curious about Ecuador is that no one's complained," Alvarez said.

"The participation was quite good," he said about the tender offer at 35.

"There was no screaming, no shouting, no tantrums as far as the market is concerned," he said, which likely indicates that it was smaller investors who lost.

Still, Quito promised it would continue to pay its obligations due on the 9 3/8% bonds due 2015 and "leave the door open" to those who did not tender at 35.

Quito has said it will not pay 35 to the holdouts, but it is willing to negotiate.

The bonds due 2015 spiked by 3¼ points to 57¾ bid, 59 offered, which is "a sucker's rally," Alvarez said.

The government is trying to compress exit yield to make it look as though they can return to the market, he said.

President Rafael Correa has changed the rules of his debt contracts already and "he can change the rules whenever he wants," he said.

Asia 'pretty firm'

Asia traded "pretty firm" even after the wave of news that hit the sector, particularly in South Korea.

"There was a fair amount of news with Roh and then North Korea," the trader said about Saturday's suicide of former-president Roh Moo-hyun and the following nuclear and missile system tests in the North.

Even without the headline shocks, "it makes some sense for accounts here to take some profits," he said, but with the underlying strength in South Korea, spreads may move back in.

The South Korean bonds due 2014 were seen at 280 bps bid, 260 bps offered.

Elsewhere in the category, Pakistan continued its strong charge as it is considered one of the "few remaining laggards," the trader said.

The bonds due 2017 were quoted at 64 bid, 66 offered.

Still, across the board "sovereigns are very well bid," he said, even when the market goes through patches of weakness, investors "buy into them."

Emerging Europe holds on

Emerging Europe traded well as Russia was forced to fight fires in the former Soviet Union.

Russian finance minister Alexei Kudrin told Belarus that it stands on the brink of a foreign debt default if it persists in supporting the Belarusian ruble with gold and currency reserves, according to the Itar-Tass News Agency.

"As the exchange rate of the Belarusian ruble is supported at a certain level by gold and currency reserves, the reserves may be exhausted in the third quarter," Kudrin said in the report.

Kudrin's comments came even as Moscow reacted to Minsk's refusal of a $500 million loan in rubles, saying it preferred dollars.

"If things go wrong with Russia, do not bow down, do not whine and weep; seek fortune in a different part of the globe," Belarus president Alexander Lukashenko told his cabinet on Friday, according to the RIA Novosti News Agency.

In Ukraine, the government plans to tackle the issue of debt for gas deliveries from Russia at the European Union summit on June 18 and June 19, according to the Itar-Tass News Agency.

Also, prime minister Yulia Timoshenko fell suddenly ill on Friday, according to reports.

Moving south, Iran began construction on the Pars Pipeline to connect gas sources in Iran with European customers in Greece and Italy through Turkey.

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