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M S RESEARCH April 21, 2010  

Credit Rich & Cheap Watch: EM Back On Track
  
Emerging markets bond spreads have effaced the recent correction, with bonds trading strong again this week. The rally was most pronounced in the 10-year sector as the composite bond index reached 196bp, an 11bp tightening from the starting levels of the last five trading days. Meanwhile, the CDS composite index tightened by only 2bp, overshadowing the bullish sentiment across Latin America as the rest of EM sold off.
  
Our Rich & Cheap model indicates that Russia has become expensive in the CDS market after it had outperformed peers in the run-up to the new eurobond issuance expected on Thursday.
  
Bond curves, in general, bull-flattened in the 5Y-10Y sector due to longer-dated bonds outperforming shorter maturities. The Mexican and Peruvian 5s10s slopes dropped by 10bp while the slightly inverted Hungarian curve normalised as the slope rebounds from the negative levels of the past month. Most of the CDS curves have moved in parallel this week, with the exception of Ukraine and Venezuela. The two most inverted CDS curves continued to revert back to a normal shape, with the slopes widening by 26bp and 7bp, respectively.
  
The 5Y bond-CDS basis widened by 2bp on a composite level, mainly driven by the Philippines, Indonesia and South Africa, where the 5Y CDS sold off amid 5Y bond spreads slightly tightening. CDS in Ukraine continued to outperform the cash market as the basis (and 5Y CDS) reaches record levels.
  
The bond-CDS basis in the 10Y sector has moved wider by 10bp as bonds performed much better this week than the credit default swap market. Indonesia, the Philippines, Mexico, Russia and South Africa saw the most widening in the 10Y basis. The difference in the 5Y and 10Y bond-CDS basis changed by 10bp in Peru, solely due to the bond curve flattening, while the shape of the CDS curve remained unchanged.
  
Our Bond Rich & Cheap model shows that the long end of the Brazil, Indonesia, Mexico, Panama and Turkey curves still offer value. The belly of Colombia, Hungary and the Philippines are also attractive on a relative basis.
  
As per our model, the cheapest bonds relative to their global curves are the following: Colombia 2017, Hungary ? Jan-2014, Mexico 2013 and 2040, Peru 2033 and Venezuela 13.625% 2018.
The richest bonds are Brazil 2025, Colombia 2012, Philippines Old’16 and New’16, South Africa 2012 as well as Venezuela 2020.     

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Leaked IMF document urges two new taxes for banks
The IMF wants two separate taxes on banks to address the huge burden of support after the 2008 financial crash
The IMF is proposing a double-tax regime for banks that would fund future bailouts and penalise both the profits and pay of lenders.
The proposal emerged in a leaked confidential document prepared for the G20 meeting of finance ministers to be held this week in Washington.
The IMF wants two separate taxes on banks to address the huge burden of support after the 2008 financial crash.
According to the fund, unrecovered costs of bank rescues in the most affected G20 countries represent 4 per cent to 5 per cent of GDP.
The first tax, a Financial Stability Contribution, would be a levy to fund any future government support. The second would be a Financial Activities Tax on the sum of the profits and remuneration of financial institutions.
The proposals were welcomed by the Government. Alistair Darling said: “The recognition that banks should make a contribution to the society in which they operate is right.” He added that any agreement must be international.
The British Bankers’ Association said it had expected a tax or a levy. “It appears it might be both. We must wait to see what is actually being proposed and how it will be calculated, but at first sight it appears wider than expected,” Angela Knight, chief executive, said.
A Conservative Party spokesman said it had led the way in supporting a bank tax whereas Labour had favoured the Tobin tax on banking transactions.
Funds raised from the FSC levy would either be accumulated in a fund to pay for bailouts of weak institutions or might be paid into general government revenues. All financial institutions would pay the FSC, which initially would be a flat rate but would then be adjusted over time to reflect the risk at each institution.
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