Emerging market levels edge higher; volume soft amidst equity noise; Korea Midland, others price deals

By Aaron Hochman-Zimmerman

New York, Feb. 1 - Prices in emerging markets pushed slightly higher in trading Friday even as investors were content to stay clear of the equity crests and troughs.

"Unless something blows up in the U.S., they're just going to sit and wait," said Enrique Alvarez, a Latin America debt strategist at think tank IDEAglobal.

Some may have been happy to see the week over as emerging markets mutual funds posted more outflows.

Emerging markets portfolios lost $457 million during the week ending Wednesday, making it the second consecutive week of outflows, according to EPFR Global.

The U.S. economy was beaten down by the lossof 17,000 non-farm jobs during January, according to the U.S. Department of Labor.

The loss came alongside news of a $44.6 billion bid by Microsoft Corp. for Yahoo!, Inc. The two headlines left sentiment running in opposite directions.

The Federal Reserve Bank also announced it will hold auctions for $30 billion of 28-day credit on Feb. 11 and Feb. 25, according to the Fed's website.

The biweekly auctions will continue until short-term funding pressures have been addressed.

The tone may have weakened throughout the day, but some issues were advancing. Venezuela's sovereigns due 2027 tacked on 1.5 to lead the winners on Friday.

The primary market also sprang to life as new issues were priced, led by Korea Midland Power Co. Ltd.'s $300 million five-year deal.

Volatility opened low and headed lower to close at 24.02, down by 2.18, according to the VIX index. The index is a commonly used gauge of market volatility.

As a sector emerging markets widened by 3 basis points in the light trading to a spread of 276 bps, according to JP Morgan's EMBI+ index. The EMBI+ determines the amount of extra yield investors require to keep assets in emerging markets debt.

Emerging Europe eerily silent

Rather than a chaotic end to a week full of rate cuts and payroll numbers "there's no volume at all," a portfolio manager said, "I'm thinking about going home now.

"I cannot tell of any kind of movement whatsoever.

"The numbers are pretty bad still," he said about the data from the United States.

Emerging market's stoicism in the face of the tumult in the stock markets was puzzling, he said.

If there was any action from the European time zone, it came from South Africa.

"The rand story is on the forefront of people's mind," he said.

Power outages continued to take their toll on the public and industry.

However, the state-run energy firm Eskom did allow 90% of power to return to gold mines owned by Gold Fields Ltd. on Friday, up from 80% on Thursday, reported the Times of South Africa.

Still, the rand was up to 7.358 from its last close of 7.447 and also from its Wednesday close of 7.56 against the dollar.

The South African bonds due 2017 were seen down 1.75 to 118.5 bid, 119.5 offered.

In Turkey, rate cuts from the central bank will be "limited" in 2008, according to a report in the Turkish Daily News.

The bank will proceed with caution as commodity and oil prices may lift inflation rates.

Inflation slowed in 2007 to 8.4% from 9.7%, the report said.

The Turkish sovereigns due 2030 added 0.25 to trade at approximately 157 bid, 157.375 offered.

Elsewhere, Friday was Russia's last day of carrying a stabilization fund.

The fund was split into a reserve fund and a national well-being fund, according to the Itar-Tass News Agency.

The stabilization fund had built up a balance of $157 billion, mostly from the sale of oil and gas.

The new reserve fund will take on 75% of the stabilization fund, or approximately 3.7 trillion rubles. The national well-being fund will begin with 783 billion rubles.

The two funds will keep 80% of their assets in debt instruments of the most stable countries, 15% in national banks of those countries and 5% in international financial institutions.

The Russian government bonds due 2030 were up 0.125 to trade at 115.375 bid, 115.5 offered.

Ukraine expects to be accepted as a member of the World Trade Organization on Tuesday, according to foreign minister Vladimir Ogryzko.

If the WTO votes to allow Ukraine to join, the government must ratify the deal by July 4, 2008, according to a WTO press release.

The former Soviet state began the membership process in 1993.

The Ukrainian sovereign bonds due 2016 were better by only 0.05 to trade at approximately 100.8 bid, 101.25 offered.

Resuscitated primary prices new paper

Just after some had given up on the primary market on Thursday, the pipeline cracked open during Friday's session to the tune of three deals priced for a total of $400 million and 4 billion yuan.

Korea Midland Power (A1/A-/A-) priced a $300 million five-year 5 3/8% eurobond at 99.438 with a spread of mid-swaps plus 198 bps.

The spread came on the tight side of talk at mid-swaps plus 200 bps.

Barclays Capital, Citigroup and Goldman Sachs were the bookrunners for the deal.

Korea Midland is a Seoul-based power provider.

Russia's Promsvyazbank (B1/B-/B-) announced the pricing of $100 million 10-year subordinated notes at par with a coupon of 12.5%.

ABN Amro and HSBC had the books for the deal.

The bonds are callable on Jan. 31, 2013. If not called, the notes step up to five-year Treasuries plus 1,125 bps.

Proceeds will be used to refinance the bank's outstanding $100 million bonds.

Promsvyazbank is a Moscow-based retail and commercial lender.

Meanwhile in China, ZTE Corp. (//BB+) announced the results of its 4 billion yuan five-year offer of bonds with warrants on Wednesday.

The deal priced at 0.8% at the tight end of talk between 0.8% and 1.5%.

A shareholders not subject to a trading moratorium will receive all of the bonds and warrants for which they applied totaling 960 million yuan or 24% of the bonds offered.

Of the applications totaling 20 billion yuan, 380 million yuan or 9.5% of the offer will be allocated to public investors.

Institutional investors applied for 140 billion yuan of bonds and warrants, but will receive 2.6 billion yuan or 66.5% of the total offer.

ZTE is a Shenzhen, China-based telecommunications firm.

A new deal was also announced by Brazil's Banco Cruzeiro do Sul (Ba1) which will offer an 18-month dollar-denominated bond via BCP Securities.

The deal has been talked at a yield of 7½%.

It is expected in February.

Banco Cruzeiro is a Sao Paulo-based retail and commercial bank.

LatAm unmoved by U.S. data, equity news

Latin America was quiet despite the eventful day on the equity side on Friday.

"The equity leadership has been all over the place," IDEAglobal's Alvarez said.

The debt market has been steady, but has shown some effort to improve levels, he said.

"Venezuela has got a better tone ... the long end of Colombia is up too," he said

Still, investors around Latin America seem content "to sit on the coupon yield," he said, as the market whips around.

"There's not much going on," he added about Friday's trading.

In Venezuela, the state-run oil producer PDVSA will pay France's Total and Norway's Statoil $1.1 billion to assume full control of the 200,000 barrel per day oil project, Sincor.

The 9.25% Venezuelan bonds due 2027 added 1.5 to trade at 102 bid, 102.5 offered.

The PDVSA issue due 2027 added 0.4 to trade at 62.2 bid, 62.6 offered.

In Argentina, the construction sector grew by 6% in 2007, its lowest rate since 2002, reported the Buenos Aires Herald.

December's 11% growth matched the 2006 figure, but it was 0.3% lower than November's growth.

The Argentine 8.28% discount bonds due 2033 gained 0.75 and was quoted at 92.25 bid, 93 offered.

Brazil's government bonds were largely flat.

The 11% issue due 2040 was unchanged at 134.3 bid, 134.4 offered. The bonds due 2037 held flat at 109 bid, 109.75 offered.

Choppy Asia, still quiet

Trading in Asia "opened with a very good tone to the market," a trader said.

Investors were feeling the sun on their faces from reports about Microsoft and Yahoo!, the trader said, as well as the talk of a consortium of banks being ready to address the monoline insurer problem.

However, "it was fading before the non-farms came in and it just got worse from there," he said about the market sentiment.

Although, "volumes were basically pretty light," he said.

Throughout the day, "we probably tightened about 10 bps in the high yield index, then gave half of it back," he said.

Spreads closed 2 bps or 3 bps tighter from the Asia close, "nothing too dramatic," he said.

In the Philippines, savings were up across all sectors in 2006, according to central bank press release.

"The non-financial corporate sector continued to be the top saver, with PHP 598 billion savings in 2006, due to increased profitability of firms engaged in real estate, construction, mining, transportation, communication and storage," according to the release.

Households placed second with a savings of PHP 367 billion and "a notable development was the PHP 116 billion savings from current operations, realized by the general government after six years of dissaving," the report said, attributing the improved numbers to strong revenue collections and slower appreciation of the peso.

The peso gained 0.15 to trade at 40.15 against the dollar.

The Philippine bonds due 2030 slipped 0.25 to 132.5 bid, 132.75 offered.

Indonesia's government bonds due 2017 were spotted at 103.25 bid, 103.75 offered.

Pakistan's sovereigns continue to see creeping confidence and more investors willing to buy.

The Pakistani bonds due 2017 were quoted at 86 bid, 89 offered.

Elsewhere, China has lost 54 billion yuan in damages caused by severe winter weather, according to a report by the BBC.

Millions are alleged to have no running water or electricity.

Coal production has been increased and price controls have been put in place.

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