Emerging market steady in thin volume; Asia sees thin volumes on cautious trade

By Reshmi Basu and Paul Deckelman

New York, March 16 - Emerging market debt closed out the week on a steady note, but the category remained cautious over lingering worries as to the health of the U.S. economy.

Asian trading posted a quiet session, as cautious investors confronted uncertainties from the U.S. external side.

The Philippines benchmark 2032 bonds were seen off slightly at 97.125 bid, as investors chose to take some money off the table, rather than regard better-than-expected budget deficit numbers out of Manila as a reason to buy.

In the high-grade sphere, Asian credits traded sideways, according to a market source.

In India's market, inflation concerns were seen pushing bond yields up and prices down, with that country's 8.07% benchmark bond due 2017 yielding 8.02%, 3 basis points wider than a week earlier.

Headlines were also impacting India's credit market, noted the market source.

The Times of India reported that Reliance Industries Ltd. was closing on a deal to set up a $20 billion joint venture with Dow Chemical Co., which would be financed through loans and equity.

The headlines triggered a 9 bp widening on the five-year credit derivative swaps. On that movement, Indian banking names saw pressure as real money accounts unwound positions. ICICI Bank saw its bonds widen by 2 to 5 basis points while its CDS spread kicked out by 5 basis points.

The ICICI bonds due 2012 were quoted about 3 basis points wider.

Steady ride for EM

In New York trading, volumes remained thin while prices were unchanged, noted another source.

"People are very comfortable to sit on their holdings," he said.

"The scarcity of supply is helping this market outperform its [equity] peers."

"And now we're beginning to see money come back.

This past week, emerging market dedicated funds saw $138.89 million enter for the week ending March 14, reported Emerging Portfolio.com Fund Research.

The market rebounded after last week's heavy sell-off in which the funds saw $555.30 million exit, which was the first time this year they had recorded outflows.

"Spreads are firmer, but I don't think many believe that current spreads accurately reflect market risk," added the source.

EM 1 bp tighter

Emerging market bonds were seen largely steady in Friday's dealings, the recent volatility appearing to be a fading memory as the sub-prime lending crisis in the United States - a key downside driver over recent weeks for both U.S. stocks and emerging bonds - was easing; stocks of several such lenders were up solidly in the day's Wall Street action.

U.S. shares were down overall on inflation numbers that make the chance of a cut in interest rates look more remote than ever, but there seemed to be little carryover to markets abroad.

The average EM bond spread over U.S. Treasuries, as measured by the widely followed JP Morgan EMBI+ index, tightened by 1 bp on the session to 182 basis points.

Brazil's 11% global bond due 2040, considered to be the most widely traded EM issue, was quoted essentially unchanged, at 133.875.

Brazil's bonds were seen pretty much unchanged to slightly firmer virtually across the yield curve. Its 8¾% notes due 2025, for instance, were quoted at 126.72 late in the session, up from 126.63 on Thursday.

The country's 7 7/8% global bonds due 2015 held virtually steady at 112.83.

Mexico's 6 5/8% global bonds due 2015, on the other hand, retreated a bit, to 107.76, down 0.1 point, while the bonds yield versus Treasuries widened out 4 bps to 5.36%.

Among other benchmark names, the Russian 5% global bonds due 2030 were unchanged at 113.38. And finally, the Turkish 11 7/8% global bonds due 2030 were unchanged at 152.81.

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