Emerging markets bond spreads wind tighter; Philippines stronger; primary bond market stagnates

By Aaron Hochman-Zimmerman

New York, Aug. 5 - Emerging markets took on a more positive tone as equities went climbing straight out of the gate on Tuesday.

Into the afternoon, the market only had intentions of going even higher as the U.S. Federal Open Market Committee decided to leave rates unchanged.

The decision was in line with what most expected, and investors seemed to agree that the accompanying statement successfully walked the line, placating both the hawks and the doves.

"The tone was much better," a trader said, compared to the difficult open to the week on Monday.

The Philippines led the way for the benchmark issues by adding 1.25 points to its bonds due 2030.

Latin America only showed moderate success as Argentina led the losers by dropping 0.5 point from its discount bonds due 2033.

Elsewhere in the primary market, traders and syndicate officials were sitting and waiting for the next streak of stability in the market, which may be able to open the pipeline.

Equities' success managed to suppress volatility on Tuesday as it shed 2.35 to 21.14, according to the VIX index. The index is a common measure of market volatility.

While equities rallied, Treasuries rolled back, which allowed emerging markets to tighten by 4 basis points to a spread of 282 bps, according to JPMorgan's EMBI+ index. The EMBI+ calculates the amount of extra yield investors will demand to keep assets in emerging markets debt.

LatAm creeps tighter

Latin America had a positive day, "relatively speaking," when considering the 331-point jump of the Dow Jones Industrial Average, according to Enrique Alvarez, a Latin America debt strategist at think tank IDEAglobal.

Latin American "equities look mixed; only Mexico got a jump," he said about the credit following the U.S. market.

"In currencies, all of those have been negative," he added.

Still, "if you look across the debt market line up, changes weren't all that impacting," he said.

Argentina continued to be "a daily underperformer" after its local markets were slammed on Monday as commodities sank and the country reacted to more political bluster from the weekend, Alvarez said.

The 8.28% Argentine discount bonds due 2033 fell 0.5 point to 73.75 bid.

Conversely, Mexico tightened against Treasuries as it added on 0.5 point to its 5 5/8% bonds due 2017, but the reason was not immediately clear, Alvarez said, discounting the Fed decision and falling oil prices.

Meanwhile, Brazil has been drifting sideways, he said, but has come off of its recent inflation inspired lows.

The real was seen trading at 1.576 to the dollar.

The 7 1/8% Brazilian bonds due 2037 were better by 0.25 point at 111 bid, 111.5 offered.

Also in Latin America, Venezuela's 9¼% sovereigns due 2027 improved by 0.5 point to 89.75 bid, 90.4 offered even as oil traded as low as $118 per barrel.

Asia rising

In Asian trading, "we definitely got a bit of a reversal off the overnight," a trader said, as the credit market recovered from a relatively weak Asian local session once Europe began trading on Tuesday.

In the indices, investment-grade credit was tighter on average by 6 bps and higher yielding credits came in 10-plus bps, he said.

Meanwhile the Philippines "caught a very strong bid," he said, as some "residual shorts" remained in the market from last week.

The bonds performed well, but "I haven't seen very much flow," he said.

The Philippines' success in credit could not be spoiled by its inflation numbers, which hit a year-over-year high at 12.2% in July, according to a release from the central bank.

Inflation bested June's 11.4% rate and pushed the year's average to 8.3%, the bank said.

"Most major commodity groups, led by food, beverages and tobacco, posted higher inflation rates relative to their levels in the previous month," the bank's statement said.

"The food items that drove inflation were rice, cereal preparations, fruits and vegetables, and miscellaneous food items (mainly coffee, cocoa, tea, salt, and cooking oil)," the statement continued.

The bank committed itself to fighting inflation as a way to keep consumer costs in check.

The peso was seen trading at 43.936 to the dollar.

The Philippine sovereign bonds due 2030 jumped 1.25 points to 128.25 bid, 128.75 offered.

Also in Asia, Pakistan's bonds due 2017 were quoted at 71 bid, 75 offered.

Indonesia hikes rates 25 bps

In Indonesia, the central bank hiked interest rates by 25 bps to 9% to tamp down its own inflation.

"Bank Indonesia still perceives a risk from inflationary pressures ahead due to crude oil, price fluctuations and growing domestic consumption," BI governor Boediono told reporters at a press conference, according to the Jakarta Post.

Inflation hit 11.9% in July and is expected to end the year between 11.5% and 12.5%.

However, the government hopes to nearly halve that rate by 2009 to 6.5% or 7.5%.

The Indonesian government bonds due 2017 added 0.5 point to 100 bid, 100.5 offered, but it was not likely a direct result of the rate hike, the trader said.

Some accounts came late in the day to buy Indonesia, which was "looking cheap," he said.

The rupiah was seen trading at 9,098.25 to the dollar.

Emerging Europe firms

Traders were busy in emerging Europe, which traded with a stronger tone, helped by a solid opening in the United States.

In Russia, the government-run oil giant OAO Gazprom announced that one of its major debtors, neighbor Belarus, has paid its debt for the first half of 2008, according to the RIA Novosti News Agency.

The second quarter's gas was paid for at the first quarter price of $119.53 per 1,000 cubic meters rather than the second-quarter price of $127.90 per 1,000 cubic meters, the report said.

The Minsk government is interested in negotiating a new price for 2009, the report added.

Meanwhile, another former Soviet state, Georgia, continued to be accused of sparking skirmishes in its breakaway province of South Ossetia.

However, on South Ossetia's northern border, Russia has said it will intervene on the side of South Ossetia if there is open conflict with Tbilisi.

Talks between Georgian and South Ossetian representatives with Russian moderation are scheduled for Thursday in Tskhinvali.

In the West, E.U. officials offered their help to settle the conflict to Georgian foreign minister Eka Tkeshelashvili, the Itar-Tass News Agency reported.

"The E.U. is ready to more actively engage in the process of a direct dialogue between Tbilisi and Sukhumi, Tbilisi and Tskhinvali, as well as events on the restoration of trust between the parties in the conflicts and economic rehabilitation of the Abkhazian and Tskhinvali regions," said the Georgian foreign ministry, according to Itar-Tass.

Elsewhere in Turkey, iron and steel producers processed 25.8 million tons to earn the rank of 11 of 15 of the world's leading iron and steel producing countries, according to the Turkish Daily News.

The 25.8 million tons represents 2% of the world's production and $12.5 billion of Turkey's exports.

Primary shut down again

The primary market again had the lights off and the door locked on Tuesday.

"No one in Latin America is in a hurry to either enter or exit the market," IDEAglobal's Alvarez said.

"There's no need to invest in the category if you have much higher yields in the U.S.," he said, adding that for now "sitting on it is, relatively speaking, a safe strategy."

"You keep hearing that there're deals out there, but no," a trader said when asked if he knew of any serious issuers in the market.

Three or four days of steady performance in the broader market are now especially necessary to bring the issuers out to market, he said.

"We'd need to see this being sustained through Wednesday and Thursday," he said.

© 2015 Prospect News.
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