Downward slide resumes; Argentina, Ecuador, lower; Venezuela, Argentina to add to Bono del Sur

By Paul Deckelman and Aaron Hochman-Zimmerman

New York, Aug. 14 - Emerging market bonds were once again on the roller-coaster ride headed downward on Tuesday, the hopeful signs of better performance seen late Friday and on Monday now just history. EM debt followed U.S. and other global equities lower, with investors once again spooked by the naggingly persistent worries over a global credit crisis.

Argentina's bonds, and those of Ecuador, were seen solidly on the downside. Brazil and Mexico were also notably lower. Among the Asian issues, Philippine government sovereigns were in retreat, and the cost of hedging against a possible default increased.

However, despite the recently choppy nature of the financial markets, the world's largest bond fund manager, Pimco, likes the emerging asset class as a whole - at least selectively, urging investors to stick with such names as Brazil, Mexico and Russia - but to back away from Argentina, Ecuador, Turkey and Hungary.

In the primary market, Venezuela and Argentina stepped out into the market scrutiny with a three-tranche add-on to their Bono del Sur III.

The issue was less ambitious than a rumored $1.5 billion issue from Venezuela.

"I know that Vene was planning to launch a $1.5 billion southern bond deal including Argy Boden [2015] re-tap," an emerging markets strategist said.

Some investors showed surprise that Venezuela and Argentina would make an offer under the current conditions.

"They are actually doing something in the market," said a buyside source said of a primary market which has experienced a dearth of new issues over the summer.

Rare new issue

Venezuela and Argentina announced the offering of a $300 million local-currency add-on to their Bono del Sur III in three tranches.

The Central Bank of Venezuela will have the books for all three tranches, each worth $100 million in the offering nation's local currency.

Venezuela will offer 6¼% notes due March 21, 2019 and 5¼% notes due April 6, 2017.

Argentina is offering 7% bonds due Oct. 3, 2015.

The three tranches are expected to price Thursday and will only be available to local investors.

Providing the bond is able to price, the tranches will trade separately of each other.

The issue comes from two countries viewed as high risk, even as many are suggesting the current market is not conducive to short-term or risky positions.

Slide downward resumes

With investors around the globe once again fearful that the credit crunch which began with the meltdown of the U.S. subprime mortgage lending industry has continued to spread, Wall Street was in retreat, with the bellwether Dow Jones Industrial Average down 207.61 (1.6%), to 13,028.92, the lowest since April and other indices down as well.

Among the victims dragged into the whirlpool were the stocks and bonds of Thornburg Mortgage Inc., by no means a subprime lender, which were pounded for a third straight session, while Illinois-based cash-management firm Sentinel Management Group Inc. froze client withdrawals due to the credit market turmoil.

While investors were abandoning relatively risky investment vehicles such as equities, high-yield bonds and emerging debt, the safety of U.S. Treasuries beckoned, and the yield on the benchmark 10-year issue declined by 4 basis points to 4.73%.

With Treasury yields down and EM yields rising as those bonds were falling, spreads between the two - seen as a key measure of investor tolerance for risk, or aversion to it - widened out. The widely followed EMBI+ index compiled by JP Morgan & Co. was seen to have ballooned out by 10 basis points on the session to 215 bps. The index meanwhile showed emerging bond returns down 0.43% on the average.

A 'poor day of trading'

It was "another poor day of trading in EM, as we closed on the lows of the day on hedge funds selling liquid assets," an analyst observed toward the end of the session. "All my credits traded poorly, with very minimal flow going through the Street.

"For the first time in the current credit crisis, EM distinguished itself as a notable underperformer."

And the worst may not be over; the analyst recommended being "very flat to slightly short the market, as I am still not a believer that we are out of the woods by any means" - especially as financial issues continue to be punished.

Argentina, Ecuador hardest hit

The worst laggards of the day were Argentina and Ecuador, whose EMBI+ average spreads versus Treasuries widened by 30 bps and 36 bps, respectively. Along with Venezuela's bonds, those volatile, high-beta credits have been among the hardest hit in the recent market downturn, although they had also been leading the market upward on days when there was a snapback from the recent declines.

Argentina's 8.28% dollar-denominated benchmark notes due 2033 were seen having fallen more than 2¾ points on the day to 83.5, while the yield on those bonds jumped by more than 30 bps to stand at around the 9.90% level.

The cost of a credit default swap contract on Argentina jumped to 442.5 bps, a record, from 400 bps previously.

Ecuador's 10% bonds due 2030 meantime were quoted down 4 points on the session to 82.5, while the bonds' yield zoomed nearly 60 bps to 12.19%.

Brazil, Mexico turn lower

Apart from the high betas, even more relatively stable paper was seen well on the downside. Brazil's benchmark 11% bonds due 2040 - thought to be the most liquid and widely traded EM instrument - lost nearly 1/3 point to finish at 130.

In the local-currency markets, Brazil's real denominated benchmark zero-coupon bonds due 2008 were lower, with their yield seen up 4 bps to 11.19%, in line with a decline in the currency unit.

Mexico's local-currency peso bonds were also lower, as that country's currency and stocks fell on credit-crunch jitters. The 10-year benchmark government bond as quoted down more than ½ point at just under 100.5.

Asian issues seen lower

Outside of the Latin sphere, the Philippine sovereigns were seen having eased a little during Tuesday's Asian trading day, with its benchmark 2031 bonds at 107.875 bid, and its 2032 bonds at 95.75.

The cost of a 5-year CDS contract, which had gyrated around during Mondays session, was seen having moved uneventfully to around 183/185 bps, about 5 bps or so wider from Monday.

Pimco likes some EM

Despite the EM market's current problems - problems not of its own making but more reflective of the world-wide credit-crunch concerns - Pacific Investment Management Co., the world's biggest bond fund manager, likes the asset class enough to manage $35 billion of EM paper.

Pimco Executive Vice President Curtis Mewbourne, in a research note posted on the company's website, said that for a variety of reasons, EM debt would be less likely to be affected by the current downturn than some other relatively risky asset classes.

But his endorsement was by no means universal. Mewbourne said that investors would do well to avoid credits "that are vulnerable to higher financing costs or volatility in financial markets like Argentina, Ecuador, Hungary, Lebanon, and Turkey and concentrate[e] in credits that have ample liquidity reserves like Brazil, Mexico, Russia."

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