Russian CDS double in cost as liquidations continue; emerging markets bond funds lose $1.87 billion

By Paul A. Harris

St. Louis, Oct. 10 - The sell-off in emerging markets debt continued on Friday, according to sources.

"We saw a pretty big capitulation first thing this morning," said a trader who focuses on Asian fixed income, and who spoke just after the early close in New York, ahead of the three-day Columbus Day weekend in the U.S. bond market.

"Philippine CDS traded well over 100 basis points wider from the last trade in Asia before things settled down," the source said.

Spreads recovered fairly quickly from those dramatic wides, coming to within 30 or 40 bps wide of the Asian close, the trader added.

"We're seeing weakness in Korea and weakness in Indonesia, in particular," the source said.

"There is a lot of weakness in the cash markets. Almost any cash bond is very much for sale. There is very little support to prices.

"And there is a lot of liquidation-type selling from clients."

Republic of Indonesia five-year CDS got hit pretty hard, said the trader, who gave levels of 900 bps bid, 1,000 bps offered, 350 bps wider on the day.

"It hasn't been like this since Russia's default on its debt in 1998," the trader said.

Russian CDS seen doubled

With the government of the Russian Federation reported to be working out the details of a financial rescue package of its own to address the turmoil in Russia's besieged financial sector, Russian CDS soared during the London session, according to a trader who spoke near the London close.

Russian CDS doubled in price, streaking to a high of 650 bps before settling to close the London session at 590 bps. Thursday's close was 325 bps, the source added.

Asked to characterize the London EM session the trader simply replied: "Carnage."

"We continue to see liquidation from the accounts."

On a price basis, Russia's 7½% global bonds maturing in March 2030 lost 12 points during the Friday session in London, the trader said, spotting them at 123 bid, 124 offered.

On Friday Standard & Poor's revised its outlooks on the long-term ratings on 13 Russian financial institutions to negative from stable.

"The outlook revisions reflect our growing concerns about the adverse impact of the ongoing domestic and international market turbulence with regard to the financial and commercial fundamentals of many domestic financial institutions," said S&P credit analyst Ekaterina Trofimova.

S&P's concerns relate to growing credit risks, tighter liquidity, pressured refinancing and weaker short-term growth prospects, and reduced profitability due to trading losses.

At any given level

Meanwhile spreads in Latin America were widening across the board, according to a strategist in New York who spoke towards the end of Friday morning.

"We've seen customers selling early in the morning," said the source who spoke on background.

"That was followed by some short covering, but nothing meaningful," the strategist added.

Brazil, where the stock market sustained a 20% loss over the past five days, saw its 7 1/8% global bonds due 2037 fall to 80 bid, 83 offered, down 10 points from Thursday, the source said.

"Establishing relative value right now has become very difficult," the Latin American debt strategist said.

"It's a trade in which investors want to reduce balance sheet exposure at any given level.

"There are a significant amount of redemptions taking place.

"As a result funds are being forced to sell issues that have some modicum of liquidity."

$1.87 billion outflow

Emerging markets bond funds took a pounding during the first week of October, according to Emerging Portfolio Fund Research, Inc. (EPFR), which reported that the funds saw $1.87 billion of outflows.

The outflow represented a 91-week high and extended the losing streak among emerging markets bond funds to nine straight weeks, EPFR added.

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