Emerging markets coast into extended holiday weekend; trade sizes shrink; spreads slide wider

By Aaron Hochman-Zimmerman

New York, May 22 - Emerging markets widened out early as trading desks were left with skeleton crews ahead of Memorial Day in the United States and Spring Bank Holiday in the United Kingdom.

Spreads came back in while equities managed to claw their way into positive territory.

Still, the credit market tone was still constructive throughout the abbreviated session as slow volumes were expected and any selling was seen as a healthy post-rally phase adjustment.

Meanwhile, along with other market sectors, which registered inflows of new money "emerging markets bond funds also extended their winning streaks," according to data compiled by EPFR Global.

"In the case of emerging markets bond funds, the recent increase in risk appetite was reflected in the fact more that half of the money committed went into funds investing primarily in local currency debt instruments," the EPFR statement said.

Equities' upward turn allowed volatility to ease lower by 0.16 to 31.19 at the bond market's early close, according to the VIX index. The index is a frequently used yardstick of market volatility.

For the week, JPMorgan's EMBI+ index found a comfortable range from 470 basis points to 480 bps with tighter spreads as 10-year Treasury yields climbed toward 3.5% by week's end.

Emerging Europe higher, Croatia on tap

Emerging Europe kept the number of trades high, but the sizes were lower as the tone was generally positive, a trader said.

The major player in the primary, Croatia, pushed its €750 million deal off to "next week's business," the trader said.

Also Poland, which recently filed a $4 billion shelf with the U.S. Securities and Exchange Commission, is not expected to bring a deal in the near term.

The Polish sovereigns due 2014 were seen at 103 bid, 103¼ offered.

In Central Europe, "a lot of retail buying" supported both the Czech Republic bonds due 2014 and Slovakia's bonds due 2015 which were spotted near 98¼ bid, 98½ offered.

The major benchmarks in emerging Europe also improved. Turkey's bonds due 2030 were quoted at 149½ bid, 150½ offered.

Meanwhile in the Middle East, the UAE's Aldar Properties PJSC bonds continued to drop.

After Thursday's loss of 1 point, the bonds due 2014 fell another 1 point to 98 bid.

Russia, Ukraine meet over gas

At a meeting of former Soviet states Russia prime minister Vladimir Putin was expected to meet with Ukraine prime minister Yulia Timoshenko regarding a possible $5 billion loan for Kiev to settle its gas debts with OAO Gazprom, reports said.

As of yet, Kiev had not received a Russian reply to its request for assistance; however, Russia president Dmitry Medvedev suggested Kiev make a request with the European Union.

Both sides agree that Ukraine needs to add 19.5 billion cubic meters of gas to its reserves, but the source of payment is still in negotiation.

The Russian bonds due 2030 were spotted at 100 3/8 bid, 100 5/8 offered.

LatAm to wait out weekend

The shortened day between Ascension Day and the three-day holiday weekend did not prove to be very active in Latin American credit.

The week saw healthy gains for some of its high-beta credits, including Argentina and Venezuela; however, the category seemed willing to hang back on low volumes while it digested economic data and reconciled recent gains.

The category has been relatively quiet on the primary side, with the exception of Mexico's Petroleos Mexicanos SAB de CV.

Still, the week also heard more rumblings about new paper from Brazil.

The market expects new 10-year and possibly 30-year bonds.

Asia holds steady

Asian trading was slow with a positive tone on Friday's early close.

Indonesia will play host to the third annual Sharia banking conference of the Asean nations on Monday and Tuesday, the Jakarta Post reported.

Financial and religious leaders will meet to further the sector, which has grown at a rate of 46% per year over the last five years, the report said.

"We see that Sharia banking in Indonesia is getting bigger and bigger. We want to push such robust development in other Asean countries, particularly those having large Muslim populations such as Malaysia, the Philippines, Singapore and Thailand," the report said.

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