Emerging markets debt rebounds; Argentina, Ecuador strong; Bogota prices; funds lose $11 million

By Reshmi Basu and Aaron Hochman-Zimmerman

New York, July 19 - Emerging market debt bounced back amid low trading volumes Thursday following the prior session's sell off as the category found support from stronger core financial markets in the United States.

U.S Treasuries closed out the session unchanged while U.S. stocks posted higher gains on the back of upbeat earnings from technology companies.

During Thursday's trading, emerging market debt fed off the stability in U.S. government bonds, remarked sources. Overall, the JP Morgan EMBI+ Index witnessed spreads narrow by 3 basis points versus Treasuries.

High beta credits Argentina and Ecuador were among the session's standouts as each country saw its spreads narrow by around 20 basis points, according to a trader.

In the primary market, the City of Bogota had the stage to itself as it priced its $300 million 21-year local-currency deal, on a sleepy emerging markets day.

Also, after 12 straight weeks of inflows, the streak died as the "number 13 jinx" saw $11 million flow out of the emerging markets during the most recent week. The year-to-date total inflow now stands at $4.66 billion, according to EPFR Global.

Investors and issuers were still largely on the sidelines Thursday, but continued to watch closely for a more fertile market.

"People still seem to be engaged," said an emerging markets syndicate official, adding that the market has been "pretty reactive" recently.

Another syndicate official put the onus to move the market forward on the shoulders of the issuers.

"Deals that are correctly structured and correctly priced will be successful," the official said.

EM bounces on safe bet

Overall the bounce in Thursday's action can be somewhat attributed to the outlook that emerging market debt is an asset class not laden with a lot risk. Furthermore, some traders are also viewing the category as a "safe haven given all that came out about hedge funds," noted a sellside source.

In recent weeks, the appetite for risk has dulled in response to the worsening of the U.S. subprime mortgage meltdown. On Wednesday Bear Stearns Cos. told investors that its two failed hedge funds, which made big bets on the home mortgage market, were essentially worthless.

Those types of headlines have made for volatile trading conditions and a pullback in risk as investors worry that the housing market slowdown could spill into other sectors, dragging down the U.S. economic picture.

However unlike the U.S. story, fundamentals in emerging markets are good and have been improving over time, noted the sellside source, which means that some investors are seeing EM as a "safe bet that they will perform accordingly with Treasuries."

In addition, some market players are taking the stance that the recent market volatility provides them with a "short-term opportunity to clean up their portfolios," he said, which means that they can sell now and buy back securities at a cheaper price.

Nonetheless, Thursday's performance was choppy while volatility remained low.

"If you put an offer out there, most likely you will get a hit or a bid," noted the sellside source.

Moreover, "a lot of activity is winding down as we get close to August," he said, adding that many may be protecting positions ahead of that.

Corporates underperforming

In another recent market trend, emerging market corporates have been trading wider to sovereigns since the onset of the volatility nearly a month ago.

Thursday saw spreads on corporate come in a bit, buy they still underperformed sovereigns.

On the Latin American side, "corps remain under pressure, almost irrespective of sovereign market," according to a corporate trader.

Meanwhile, securities of Brazilian airline TAM SA saw more pressure Thursday, following Tuesday's plane crash that killed nearly 200 people.

TAM is off about 1 point from Wednesday's session, "but about ¼ pt better today [Thursday]," noted the trader.

Turkey bounces back

In other news, Turkey recovered from Wednesday's sell-off, propped up by the country's latest opinion polls which show that the ruling AK Party will easily draw enough votes to form a single party government.

On Wednesday, investors reduced their positions ahead of Sunday's parliamentary election to insulate themselves from any election surprises.

But now that the AK Party is expected to garner approximately 48% of the vote, market players are more comfortable about adding to their positions.

Investors snatched Turkish debt on the unlikelihood that any negative headlines would emerge now until Sunday's election.

In trading, the Turkish bond due 2030 was spotted higher by 1/8 of a point.

Bogota prices at tight end

With the only completed deal of the day, the City of Bogota priced $300 million 21-year local-currency fixed-rate senior notes (Ba1/BB+/BB+) at par to yield 9¾%.

The issue came at the tight end of initial guidance in the 9 7/8% area.

Citigroup and Deutsche Bank had the books for the Rule 144A and Regulation S deal.

The bonds, maturing on July, 26 2028 are payable in dollars and will amortize in equal parts in 2026, 2027 and 2028. The bonds carry a 20-year weighted average life.

Proceeds from the sale will be used for general budgetary purposes.

"We think that Bogotá is tapping markets at this time under an opportunistic sense - i.e. trying to lock-in a relatively low rate in the international markets. If anything, the local markets are fully open to absorbing additional levels of issuance from this city," wrote Alberto Bernal, fixed income analyst for Bear Stearns, in a research note.

Gazprom still in

Though postponement rumors about Russian oil giant Gazprom's benchmark-sized dollar deal have been heating up the wires, a source close to the deal insisted the show will go on.

"Every day is full, there's been overwhelming inquiry," the source said, adding that if there's one deal that's in, this is it.

Pricing is expected the week of July 30.

The rumors had been at least partially based on the July 16 withdrawal of the proposed benchmark-sized deal by fellow Russian oil giant Rosneft.

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