Risk aversion increases on U.S. economic data; EM credits off highs; primary stays silent

By Christine Van Dusen

Atlanta, Aug. 24 - A new and negative economic report out of the United States, coupled with the fact that August consistently brings thin volumes and little new issuance, made Tuesday a slow day for emerging market debt.

The National Association of Realtors on Tuesday reported that existing home sales in the United States in July suffered their biggest monthly decline, falling about 27% to a seasonally adjusted annual rate of 3.83 million units, and total housing inventory climbed 2½%.

"That's confirmed the slowdown of the recovery," a London-based investment analyst said.

And it has turned the market's attention toward the U.S. and away from the continuing European economic crisis. Indeed, investors hardly noticed the news that Hungary is expected to resume bailout talks this fall after recently cutting them short due to disagreements with the International Monetary Fund.

"Europe is still an issue," the analyst said. "But people can concentrate on only so much bad news."

The analyst is now keeping an eye out for the Sept. 3 release of the U.S. Department of Labor Bureau of Labor Statistics report on the employment situation for August.

"That will have some impact on the market," he said. "People could assume it will be a bad number and position themselves for that, and that would keep volumes low next week. Or volumes could pick up in anticipation of the data. It's hard to say."

Money on sidelines

The story of the last week was "very, very vague weakness in both sovereign and corporate credit" despite "continued tightening in Treasuries and falling in yield," the investment analyst said. "The spread to Treasuries was widening, but on an overall price basis it was better."

By Tuesday, though, the price side started to change. "Spreads are widening and bonds on a price basis are losing a half point to a point in many cases," he said. "With the U.S. existing home sales data announcement, that has continued the trend on a more pronounced basis."

Bonds "continue to give up a little bit," he said. "But there's not a lot of volume. People are afraid to sell at these levels. It's hard to sell into this kind of market, especially with volumes so low."

Low as they were, volumes on Tuesday were better than Monday, a New York-based trader said.

"Real money accounts" have decided to "step aside and see where the markets settle," he said.

The analyst expects volumes will pick up after Labor Day, he said.

Credits off highs

In the secondary market, the source said nothing really stood out amid the light trading volumes.

The tone, overall, was "softer for the first time in weeks," a Brazil-based market source said.

That was especially true for Brazil's corporate names. "We're starting to see some profit-taking on bonds that were impossible to source."

He pointed to the $1 billion 6½% 10-year notes from Rio de Janeiro-based steel producer Companhia Siderurgica Nacional (CSN), which priced in July at 99.096 to yield 6 5/8%, or Treasuries plus 357.7 basis points, via BB Securities, HSBC, Itau, Morgan Stanley and Santander.

The New York trader noted that Argentina and Venezuela saw "an even deeper sell-off as risk appetite declines and some profit-taking appears."

Argentina's Boden 15s closed at 87.70, down 2.3 points from Monday night, he said. Discounts are quoted at 79.25, down 3 points from Friday. Venezuela's bonds are down 1 to 1.5 points on the day with the 22s at 83.30.

Worth noting, another trader said, was that "most credits trading into bids were not only trading off their recent highs but, more important to note, off their all-time highs, making the digestion of the downtrade much more palatable."

Primary still quiet

Primary activity was, as expected, paralyzed Tuesday by the typical summertime slowdown and the U.S. economic data.

"My guess is that post U.S. Labor Day, we should see good primary activity," the Brazil-based market source said.

A deal that could come once the pipeline opens up is a $1 billion sukuk offering of bonds from Saudi Arabia-based Islamic Development Bank, a 56-member financial institution that for months was expected to bring two benchmark-sized offerings of Islamic bonds. The proceeds would be used to increase lending to member states coping with economic difficulty.

Market sources also were whispering about a potential $600 million issue of eurobond notes from Brazil-based bank Banco do Nordeste do Brazil with Deutsche Bank.

"I think if it comes it should be a small deal," the Brazil-based market source said.

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