Emerging markets drawn wider; prices generally weaker; Turkey deal not well-received

By Aaron Hochman-Zimmerman

New York, Feb. 28 - Prices in emerging markets fell in Thursday's session, but the losses were far outpaced by gains in Treasuries, which ripped spreads wider.

"Everything is a good 15 bps wider today," a syndicate official said.

Trading brought prices slightly lower across the board, but Ukraine led the losers by shedding 1 point from its bonds due 2016.

The primary offered new local-currency deals, but most of the chatter surrounded the disappointing Turkey $1 billion 30-year offer completed on Wednesday.

"It was another wake up call," the syndicate official said. "It's bad out there."

The data from the Labor Department knocked equities lower as initial unemployment claims were up by 19,000 last week to 373,000, which was higher than many expected.

Yet, Federal Reserve chairman Ben Bernanke said in his testimony before Congress that the country will not likely face the stagflation the country saw in the 1970s.

"There are still a lot of problems in this economy," a trader said.

Volatility waffled but never dipped below Wednesday's close as it ended higher by 0.84 at 23.53, according to the VIX index. The index is a widely used gauge of market volatility.

As Treasuries surged, emerging markets was pulled wider by 12 basis points to a spread of 276 bps, according to JPMorgan's EMBI+ index. The EMBI+ estimates the amount of extra yield investors will demand to keep money in emerging markets debt.

The EMBI global diversified index, which represents sovereigns and quasi-sovereigns, was wider by 14 bps with a spread of 303 bps.

The diversified index has a less strict liquidity rule for inclusion.

"That's Treasury related spread widening," an emerging markets strategist said.

Emerging Europe stretched wider

As the rally slowed and turned south, volumes ran thinner in a quiet emerging Europe.

Prices held in, but spreads were pulled wider by advancing Treasuries.

Russia's central bank announced that it will allow the creation of the National Bank of the Chechen Republic in Grozny, reported the Itar-Tass News Agency.

Elsewhere, relations between Russia and Ukraine are still strained over differences in energy policy and feelings toward the West.

However, "the dynamics of Ukrainian-Russian relations is very good, the active dialogue is keeping up, our relations became much more pragmatic," Ukraine president Viktor Yushchenko said at Thursday's Europe-Ukraine international forum, according to Itar-Tass.

Still, he tempered his remarks.

"Some issues, particularly in the energy sector, need a serious solution. I cannot but say these are easy relations, but I am satisfied with their condition," he said.

Yushchenko also pushed for a free trade zone between Russia and Ukraine.

Meanwhile, Ukraine prime minister Yulia Timoshenko was hospitalized on Thursday with what was reportedly the flu.

Health concerns have often followed the prime minister.

The Ukrainian sovereign bonds due 2016 fell 1 point and were quoted at 97.75 bid, 98.75 offered.

The Russian government bonds due 2030 were better by 0.3 point and quoted at 113.9 bid, 114.175 offered.

Possible rate cuts in Turkey

In Turkey, the central bank was encouraged to cut lending rates by the minister of industry and trade, Zafer Caglayan, a market source said.

It is likely that the central bank will cut rates by up to 150 bps this year, the source said.

The suggestion came as Turkey placed a $1 billion eurobond, a smaller issuance than was hoped for, according to a syndicate official.

Another $4.5 billion in issuance is expected in 2008.

The Turkish sovereigns due 2030 dropped 0.8 point to 151.875 bid, 152.1 offered.

Pipeline still running slow

Turkey found a moderately receptive primary market for its $1 billion 30-year eurobond, priced at 96.457 and a spread of 289.80 bps.

Still, the rocky market may not be as forgiving to smaller or lesser-known issuers.

"Turkey was a pig, so not very helpful" to the overall primary, a syndicate official said.

"Otherwise nothing going on," he said.

"It was a long-dated bond, so it's not what anybody wants," a strategist said.

"Increasingly investors are demanding shorter-duration assets," he said.

"The Turkey deal didn't actually go well at all," another syndicate desk official said, adding that they had hoped to issue more than $1 billion, yet "The order book was a little over $1 billion."

"It probably spooked people a little," he added.

The problem in the emerging markets primary lies in more attractive, cheap and highly rated paper offered in the United States, he added.

The new sovereign bonds due 2038 "were down quite a bit" in trading, the strategist said. The bonds were quoted at 96.375 bid, 96.645 offered.

OJSC Russian Agricultural Bank (BBB+/) announced it plans to offer a Swiss franc-denominated limited recourse loan participation note.

The bank will distribute proceeds in support of the Russian agriculture markets.

The notes will be sold through RSHB Capital SA and loaned to Russian Agricultural Bank.

The Russian Agricultural Bank is a Moscow-based state-run bank focused on agriculture.

Also, Swire Pacific MTN Financing Ltd. (A-) announced its plans to offer a HK$250 million 10-year senior unsecured fixed-rate note.

The proposed notes will be due in March 2018.

Swire is a Hong Kong-based holding company.

"Then I'm sure it'll do well," a strategist said upon hearing of it's A- rating.

"Everybody wants high grade these days," he said.

Quiet LatAm feels weaker

Latin American trading was slower and quieter on Thursday after an optimistic opening to the week.

Falling equities pushed Treasuries up farther than bond prices were down, leaving spreads wider, a syndicate official said.

Venezuela's 9¼% government bonds due 2027 slipped 0.1 point to 99.65 bid.

In Brazil, police arrested four people in connection with information and hardware stolen from the state oil firm Petroleo Brasileiro SA on Feb. 20.

Reports said the crime was more petty theft than the corporate espionage that was originally suspected.

Many in Brazil took notice of the theft. Even president Luiz Inacio Lula da Silva said "state secrets" about recent oil field discoveries had been stolen.

The 11% Brazilian bonds due 2040 gained 0.4 point and was quoted at 134 bid. The 7 1/8% bonds due 2037 gained 0.1 point and were seen at 107.5 bid.

The Petrobras notes due 2018 were lower by 0.5 point at 98.5 bid.

Kirchner to make changes at Indec

Argentina president Cristina Kirchner will "explain and hopefully demonstrate the things that were done incorrectly by the Indec and clearly explain what we understand should be done in line with the new consumption patterns that Argentines have adopted," she said about the national institute of statistics and census during a radio interview, reported the Buenos Aires Herald.

The reporting of economic data has been widely criticized in the past, yet the new methods are still suspect even based on preliminary information, the report said.

The market did not react favorably to the last attempt Argentina made to introduce more transparency to Indec, a strategist said.

The Argentine 8.28% bonds due 2033 added on 0.25 point and were spotted at 89.25 bid.

Asia feeling 'pretty poor'

"Credit as a whole across Asia felt pretty poor today," a trader said.

"We're going to be dependent on the health of U.S. consumer going forward," he said, and "There are a lot of jittery feet out there."

Still, there may be room for some improvement in the near term, he said.

In the Philippines, negotiations for a five-year loan from China for infrastructure development will be postponed until charges of corruption can be investigated, the Manila Times reported.

The contract with Chinese construction company ZTE Corp. for a $329 million national broadband network in the Philippines was allegedly padded with $130 million in kickbacks for Chinese government officials, the report said.

Other projects that will be postponed included improvements in agriculture, housing and natural resource development.

The Philippine bonds due 2030 were better by 0.25 point to 129.5 bid.

Indonesia's revenue from commercial fishing dropped due to new regulations on the industry, according to the Jakarta Post.

Revenues for 2007 were 112.5 billion rupiah, a 45% drop from the 203 million rupiah in 2006.

The target collection for 2007 was 200 billion rupiah.

The Indonesian bonds due 2018 were unchanged at 104.25 bid. The bonds due 2038 were spotted at 104.375 bid.

In Pakistan, police arrested a militant suspected of contributing to the October bomb attack on former prime minister Benazir Bhutto that killed 135 people in Karachi, reported the BBC.

Bhutto survived the attempt, but was assassinated in another bombing on Dec. 27.

The Pakistani sovereigns due 2017 were better by 0.5 point at 87 bid.

"We still saw buyers of Pakistan risk," the trader said.

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