Emerging markets fall off rally pace; week finishes positive; South Korea tightens into supply

By Aaron Hochman-Zimmerman

New York, March 27 - Emerging markets lost hold of the rally that carried the sector through most of the week, but most levels still ended better than Monday's open.

Overall, emerging market bond funds took on new money "for only the second time in the past 33 weeks," EPFR Global said in a press release.

Still, "investors have certainly not abandoned all caution. Flows into emerging market bond funds were underpinned by funds geared to debt denominated in hard rather than local currency ..." the release continued.

In trading, the activity was "crazy," a trader said.

"When it moves this much it's better to be in and out," he said, "unless you really have the pockets for it."

South Korea performed well even as many believe it is host to several potential new issuers.

The five-year CDS tightened 50 basis points during the week, a trader said.

Equities fell into the weekend as volatility crept back by 0.68 to close the session at 41.04, according to the VIX index. The index is a frequently used yardstick of market volatility.

As a sector, emerging markets narrowed by just 3 bps to a spread of 619 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 'definitely outperformed'

Asia was "still quite firm" as the other sectors pulled back, a trader said.

"It definitely outperformed," he said, even though spreads "pulled back from squeezy tights."

South Korea's five-year CDS tightened over the week by nearly 50 bps to a 360 bps bid.

The South Korean protection "tightened into supply" as many expect others to follow Hana Bank, which will begin a roadshow on Monday for a dollar-denominated benchmark-sized bond offering.

"The CDS market is much less driven by supply ... there isn't as much demand for protection," the trader said.

In Indonesia, the government will begin to accept bids for $34 billion in infrastructure improvement contracts this year, according to the Jakarta Post.

"Eight projects are ready to be launched this year," said state minister for national development planning Paskah Suzetta.

Some of the larger projects include water purification and transport, seaport development and toll road development.

All of the 87 projects are scheduled for completion between 2010 and 2012.

The Indonesian government bonds due 2019 were seen at 109.625 bid, 100.125 offered.

In China, vice premier Wang Qishan said the country has decided to contribute extra funding to the IMF "within its ability," according to reports.

Also in Asia, the Philippines' sovereign bonds due 2030 were quoted at 118 bid, 119 offered, while Pakistan's bonds due 2017 were seen at 48 bid, 51 offered.

LatAm ends with 'better footing'

Latin America lagged throughout much of the week but ended on "a better footing than we were on last week," said Enrique Alvarez, a Latin America debt strategist at think tank IDEAglobal.

The major action of the week, of course, came from Peru, he said.

"They had to overpay enormously" for the $1 billion 10-year deal, which priced late Wednesday.

The spread of Treasuries plus 437.5 bps "easily was 40 to 50 bps more than what you could've expected," he said, but "it gives you a really good flavor of what the market is like."

For the other BB+ rated credits, "it's not very positive," he said.

Whether positive or negative, another development that has been building in Latin America is an equity bubble.

"Equities in LatAm are looking past what we expect," Alvarez said.

The possibly positive aspect for bondholders is that credit has "been much less convinced the outlook is that great," he said.

The negative side is that an equity pullback "could drag you lower" if you are a bondholder, he said.

In Argentina, bonds were improved as the legislature finally agreed to hold parliamentary elections on June 28.

The 8.28% Argentine discount bonds due 2033 added 1.125 points to 26.5 bid, 27.875 offered.

In Venezuela the 9¼% Venezuelan sovereigns due 2027 gave up 0.25 point to 57 bid, 58.375 offered.

In Brazil, the 5 7/8% Brazilian bonds due 2019 slipped 0.75 point to 97.25 bid, 97.75 offered.

Meanwhile, the 8 3/8% Peruvian bonds due 2016 fell by 1.125 points to 110 bid, 112.125 offered.

"That curve got really sent for a spin," Alvarez said.

Emerging Europe sells into weekend

Emerging Europe saw some selling on Friday after Thursday's "huge tightening," a trader said. "It's taking a breather."

"It was one of the most vicious days of tightening this year," he said about Thursday.

Bulgaria's five-year CDS narrowed nearly 90 bps and came off the tights but was still available at 460 bps bid.

The entire market came together to support the rally, he said.

"Everything was quite supportive," he said, from equities to data to strong headlines.

Turkey held the gains it accumulated from its upward trajectory throughout the week.

Many had their eyes on Turkey as it headed into Sunday's election.

After the election, Ankara is expected to finalize an agreement with the International Monetary Fund.

The Turkish sovereign bonds due 2030 slipped 0.875 point to 135.125 bid.

Meanwhile, the IMF found €3 billion in order to help stabilize Serbia on Friday.

The deal follows an emergency €20 billion loan for Romania on Wednesday.

Winterland warriors

In Russia, the military intends to field an arctic force by 2020, reports said.

The United States, Canada, Denmark, Norway and Russia are all very conscious of what is believed to be 90 billion untapped barrels of gas resources buried beneath the polar ice, and the Russian force will "guarantee Russia's military security in diverse military and political circumstances," said a spokesman for the Russian Security Council, according to the RIA Novosti News Agency.

The plan "does not mean that we are planning to militarize the Arctic. We are focusing on the creation of an effective system of coastal security, the development of arctic border infrastructure, and the presence of military units of an adequate strength," the official said.

The Russian government bonds due 2030 gave back 0.75 point to 94.75 bid, 95.25 offered.

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