Emerging markets rebound on better Greece news; yields fall; Banco Cruzeiro delays notes

By Christine Van Dusen

Atlanta, May 10 - Sunday night's news that E.U. leaders had agreed to a massive bailout designed to save Greece and other financially troubled nations and contain the debt crisis gave emerging markets a much-needed boost on Monday, once again attracting investors to the asset class and potentially opening the door to new issuance later in the week.

But some market sources cautioned against unbridled optimism, as some of the bailout's details need to be ironed out and time is needed to measure the plan's effect.

"There's plentiful rebounding," said Enrique Alvarez, debt strategist with think thank IDEAglobal. "It's a knee-jerk reaction to the compressed spreads we've been getting on European and Southern European sovereign paper and the overall reaction to the very large headline number that Europe has produced as part of this rescue package."

The International Monetary Fund and European officials have agreed to pay out €20 billion in loans to Greece now as part of a stronger attack on the sovereign's debt problem after the €110 billion bailout plan appeared to do too little to contain the contagion.

On Monday yields decreased - 10-year Treasuries fell to about 3.53% from 3.609% and 30-year Treasury yields declined to about 4.396% after last week's high of 4.46% - with investors moving back into riskier assets, sources said.

The JPMorgan Emerging Markets Bond Index Global hit 304 basis points on Monday, 35 bps tighter.

There's evidence that "some of the immediate default risk that was coming from Europe seems to have been tamed, at least for the time being," Alvarez said. "That is going to likely mean a better risk climate for EM and LatAm debt instruments."

But still there's a sense of wait-and-see, he said. "We need to see, over the coming weeks, how this plays out because there are a number of moving parts in the rescue package. Some are critical and large and need ratification by legislatures across the continent. That may become a sort of stumbling block or a hurdle as we move ahead."

Secondary bounces back

The tone in the secondary for emerging markets on Monday was "the exact opposite of last week," Alvarez said. "Last week there was a lot of pressure on the high-beta camp and lessened pressure and downside on core credits. Here we're getting a sort of moderate bounce-back of core credits but an outsized rebound in high-beta."

According to a New York-based market source, "good EM stuff continues to be well bought. There are better buyers, of course. However there are still some leftover illiquid positions that are trying to sell into strength."

Overall the day saw a rally in "Latin American corporate names, particularly liquid high quality," he said. "A continued rally will boost the illiquid high-yield names. Right now they're opening up 20 to 30 basis points tighter in investment-grade Latin America. And high-yield names are up 1 to 2 points."

Argentina saw "upside," Alvarez said. "And there's a similar run, though of less magnitude, for Venezuela."

At this point "it's very difficult to read anything else into it," he said. "We'll have to see how the markets operate."

Said the New York source: "It will take someone testing the water, which I wouldn't expect until later next week."

Primary still hushed

The primary remained quiet on Monday as issuers continued playing the waiting game, with yet another issuer delaying a deal. This time it was Sao Paulo-based lender Banco Cruzeiro do Sul's five-year notes via Bank of America Merrill Lynch, BCP Securities and UBS, according to an informed market source. The deal had been whispered at 9% to 9½%.

"I would expect we need another day or so of stability before any EM prices," the New York-based market source said. "I would expect some of the sovereigns to get their deals done earlier in the week and corporates to follow."

Several sovereign deals have been waiting in the wings. There's Morocco, with a planned euro-denominated benchmark-sized issue of global bonds. There's the Slovak Republic, with its planned euro-denominated 10-year benchmark notes. And there's Albania, which recently delayed its proposed dollar-denominated bonds via JPMorgan and Deutsche Bank.

Market-watchers also are whispering about possible issuance from Slovenia, Belarus, Macedonia, Tanzania, Malaysia, Mongolia and Guatemala.

Another sovereign that could soon bring a deal to market is Argentina, with the $1 billion offering of seven-year bonds that's part of the country's restructuring plan. Some market sources say the bonds could price as soon as this Friday, but Alvarez isn't so sure.

"We'll have to see how the climate changes throughout the week," he said. "It's very dependent on that. It's more of an issue of what sort of demand could be there. So I think it will remain to be seen how much more of a soothing effect we're able to see within markets because of this European bailout proposal."

Overall, "we've reversed course on the trend that had become so pervasive last week," Alvarez said. "We've turned the corner there and look to be in a better light overall for risk tolerance."

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