Emerging markets mostly quiet; Venezuela's benchmark bonds strengthen; sector spreads tighter

By Aaron Hochman-Zimmerman

New York, April 24 - Emerging markets ended a volatile week with a quiet Friday while levels pushed higher despite some negative headlines from the local markets.

The major headline showed positive results from the U.S. Treasury Department's stress tests. The preliminary findings were generally not surprising, but equities were improved, which helped nudge forward the credit side.

Many investors wondered how far the market would go without a true correction.

"We're going to have to test the S&P at some point," a trader said.

"I expect to see credit give back some of the gains of the last month," he added.

On Friday, emerging market credit was broadly up only slightly, but Venezuela stood out again as a strong performer.

The benchmark bonds due 2027 tacked on another 2 points.

Also, volatility shed 0.33 to close the session at 36.82, according to the VIX index. The index is a frequently used yardstick of market volatility.

As a sector, emerging markets pulled tighter by 8 basis points to a spread of 545 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.

Emerging Europe slows

Emerging Europe saw "a slow ending to the week" after many spreads across Central Europe "blew out" at the beginning of the week, a trader said.

By Thursday and Friday, some "protection looked cheap," he said.

Romania and Bulgaria were "grinding tighter" as the credits appeared cheap after they were damaged earlier.

The Romanian bonds due 2018 added 2 to 3 points on Thursday but were better by 1 point to 90 bid on Friday, he said.

Also, Poland's bonds seemed cheap, the trader said, as the country's budget deficit was revised to 4.6% of GDP from 3.9% of GDP.

The zloty was "trashed" on the news, a source said.

The zloty was seen trading at 3.3904 against the dollar.

Also in the emerging Europe, Turkey's fate seemed linked to the anticipated completion of a new arrangement with the International Monetary Fund, he said, but "that's the case with IMF and everyone."

The Turkish sovereign bonds due 2030 added 2 3/8 points to 144½ bid, 146 offered.

On the corporate side, the $2.25 billion in bonds that were priced on April 17 by Russia's OAO Gazprom initially traded up but by the end of the week were just "looking OK," he said.

Russia's government bonds due 2030 were better by 1 1/8 points at 95 7/8 bid, 96 1/8 offered.

In Ukraine, the embattled BTA Bank has been unable to make its repayments, the trader said.

The bank is in restricted default, according to Fitch Ratings.

LatAm creeps up with equities

The U.S. equity market reacted well to the preliminary results of the Treasury Department's financial sector stress tests, but "there's not a whole lot of change on the LatAm fixed-income side," said Enrique Alvarez, a Latin America debt strategist at think tank IDEAglobal.

There have only been "little pops" as a result of the tests, he said, although "we are starting to see a little bit of a bid coming in for Brazil and Mexico."

The 11% Brazilian sovereigns due 2040 were better by 0.4 point at 127.6 bid, 127.9 offered, while the 5 7/8% bonds due 2019 were unchanged at 97 bid.

However, in Mexico there is rising concern that a swine flu outbreak may scare off potential tourists, he said.

As many as 61 people may have died from the disease in both the United States and Mexico.

Venezuela "had already been up" on the day, he said.

The 9¼% Venezuelan government bonds due 2027 added 2 points to 65 bid, 66¼ offered.

Also in Argentina, the government calculated its own economic growth at 2.4%.

"It's just amusing," Alvarez said about the notoriously doctored numbers from Buenos Aires.

"They're the unique case in Latin America where they saw no months of negative growth," he said with a healthy side of sarcasm. "We should all follow their example."

The 8.23% Argentine discount bonds due 2033 added ½ point to 29½ bid, 30½ offered.

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Tempered Asia mildly tighter

Asia felt mild "fluctuations" after the headlines about the stress tests hit the market, a trader said.

"There really wasn't anything new in it," he said.

Indonesia claimed the title of outperformer for the day on the sovereign side, he said, as the Indonesian sukuk due 2014 was quoted at 101¾ bid, 102¼ offered.

On the corporate side, there was also strong demand for Korean bank paper.

The interest in Korea's banking sector is encouraging "considering how much supply there has been," he said.

The Industrial Bank of Korea, which priced $1 billion at a spread of 556.6 bps on April 16, traded as wide as 580 bps bid this week, he said; but the spread was seen back beneath reoffer at 550 bps on Friday.

In the Philippines, government bonds due 2030 were seen better by ¼ point at 119¼ bid, 120¼ offered.

Pakistani paramilitary push Taliban

In Pakistan, paramilitary and police forces were able to repel Taliban fighters from the area around Buner, which is less than 65 miles or 100 kilometers from Islamabad.

Pakistan recently ceded nearly full control of the Swat Valley region to the Taliban, which will enforce Islamic law in the region.

The United States and others objected to the deal with the militants.

Still the Pakistani bonds were seen trading at 52 bid, 55 offered.

"I'm surprised people don't care more about it," the trader said about the fighting; "it's amazing."

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