EMBI battles back from early slide; Venezuela hovers near two-year lows; Philippines CDS gaps higher

By Paul Deckelman and Aaron Hochman-Zimmerman

New York, June 27 - In Wednesday's emerging markets action, the EMBI-plus index's spread to Treasuries widened early but battled back to end the session nearly unchanged.

Meanwhile, as "nationalization" rhetoric continues to rage in Venezuela, its sovereign debt was seen near two-year lows.

And Philippines credit default swaps continued to point towards growing risk-aversion among investors.

The appetite for risk

In the secondary market, bonds fell broadly in the early going amid continued investor concern that the recent problems in the U.S. subprime lending market - including losses suffered by hedge funds and other investors - were a signal to cut back on riskier investments, including emerging market debt.

However, later in the day the EM issues for the most part bounced off their initial lows, encouraged by a rally in U.S. equities, the first in four days - a sign of investor confidence in the American economy, which in turn bodes well for emerging economies helping to sell their goods in the States.

Conversely, while U.S. Treasuries were initially stronger in a continuation of the recent flight-to-safety phenomenon, they ended the day pretty much unchanged, which put the damper on the early

spread-widening seen in the emerging markets sphere.

The benchmark U.S. 10-year note's yield - which at one point had tightened all the way down to 5.02% - surrendered those gains and went back up to where it had begun the session at 5.08%, although that was still considerably inside of the recent peak levels above 5.30% seen at mid-month.

With those Treasury yields coming back up, the widely followed EMBI+ index compiled by JP Morgan & Co., which measures investor appetite for risk by gauging average spreads over Treasuries of selected EM issuers, and the EM universe as a whole, at first moved as high as 174 basis points, a 6 bps rise, before later coming back in to end only about 1 bp wider at the 169 bps mark.

However, that market measure remains a good 20 bps wider than the all-time tight levels in the upper 140s at which it had begun the month.

Also zig-zagging were the volatile bonds of such high-beta credits as Venezuela and Ecuador, whose gyrations have reflected not only overall EM weakness but political turmoil in those countries which has roiled the markets in their securities.

Enrique Alvarez, head of Latin American debt strategy for the financial research firm IDEAglobal, half-jokingly terms those countries, along with Argentina "the terrible trio of LatAm."

He said that the emerging sector was seeing "a continued [bout of] volatility in the marketplace, and I think this is all obviously a by-product of what's going on on the U.S. credit side. Granted that fact, I think that while things today don't seem to be in a complete spiral, what you are seeing is an extension of the correction in high-beta-type names, and that's what's dragging the major indexes to the downside."

Venezuela nationalization noise

A market source quoted Venezuela's benchmark 9¼% dollar-denominated bonds as having lost 1¾ points on the day to end at 104.85 - its lowest level in nearly two years - while the yield on the bonds ballooned out by more than 15 bps to above 8.70%.

Those bonds continued to tumble in the wake of Tuesday's news that that global oil giants ExxonMobil Corp. and ConocoPhillips decided to walk away from talks aimed at establishing their new role as the junior partners in the Orinoco River Basin heavy oil joint-venture projects the companies had been operating with the state-run Petroleos de Venezuela SA, which is now in control of those projects following their state takeover on May 1.

The two companies' decision to abandon operations in Venezuela following that nationalization has stoked investor fears of operational problems with the plants, which were taken over as part of president Hugo Chavez's controversial ongoing effort to bring large and important parts of the Venezuelan economy under direct state control. Chavez has said he is implementing a "socialist revolution."

The effort to nationalize the Orinoco projects "sort of exacerbates the negative sentiment that is already linked to the credit, and what it does is it gives investors another reason to use this as a good proxy to hedge themselves against an overall market unwinding," Alvarez said.

He explained that "what investors are doing at this point in time is seeing that there's a lot of headway to be made in selling these three credits short - Venezuela in particular - due to the negative domestic surroundings.

"Instead of completely unwinding positions, they're using this as a hedging method. So they're shorting Venezuela, alongside Argentina, and Ecuador, to a lesser extent, as a way to compensate some of the market losses that may come about."

PDVSA's own bonds have fallen over the past two sessions in response to investor concerns about the two oil majors' pullout from the Venezuelan joint ventures. In Wednesday's dealings, the state oil company's 5¼% dollar-denominated bonds due 2017 were quoted down about ½ point on the day to about the 75 level, while its yield was seen having widened about 9 bps to 9.14%.

Alvarez was skeptical about the idea that the sudden takeover by the state of the projects might trigger a technical default in the bonds of PDVSA or the individual projects.

"There would have to be a specific ownership clause - and if anything, PDVSA is not giving up ownership - it's taking on majority ownership, so I am not totally certain that there is any basis for the possibility of a technical default. I would tend to think not, and I don't think the market is pricing that in."

Argentina, Ecuador lower

Among the other high-beta credits, Argentina's 8.28% dollar bonds due 2033 were quoted down a point to 96.25, while Ecuador's 10% benchmarks due 2030 fell by about ¾ point to the 85.25 level; the latter bond, though, bounced off its earlier lows - at one point they were down some 2½ points - to finish only modestly lower.

The Ecuadorian bonds' yield at one point gapped out by nearly 40 bps, before improving to just 10 bps higher at the close at 11.87%.

Asian names decline

Outside of Latin America, Asian bonds were seen trading lower earlier in the day, as part of the overall market weakness at that time, with the Philippines government 2031 bonds seen down ¼ point at 110.5 bid, 110.75 offered, while the five-year credit default swaps contract shot up to levels around 113-116 bps, versus 107-110 bps earlier - a sign that investors see the underlying debt as that much more likely to default.

Overall in the emerging markets, IDEA's Alvarez said, "I think you are continuing to see a very slight correlation building with what's going on in the U.S. equity market - as long as equities seem to firm, the [EM] market seems to stop its momentum to roll to the downside.

"However, the market is very subject to rumors coming out of the U.S. credit side and the trend overall seems to be to the downside at this point."

A quiet primary

In the primary market, Malaysia's MISC Bhd. put its offer on hold, while a sovereign came out from the Oblast of Samara region of Russia. Poland's semi-sovereign PKN Orlen announced a new deal along with Romanian Telemobil SA.

One analyst said that the market could be worse if not for lower profile players keeping it afloat.

"The market still has cash on the sidelines, and that's made it hard for things to get much worse than they've gotten so far," the analyst said.

"[Certain investors] are carrying very high cash positions right now, and that's not really a secret, so people are hesitant to sell when they know there are still guys lined up to buy on dips.

"Some more severe stress in U.S. markets could keep those cash-rich guys on the sidelines, but it is helping to dampen the turmoil in EM," the analyst said.

Malaysian MISC pulls

MISC postponed offer of $750 million 10-year bonds (A2).

The decision was made in order to hold out for "more stable market conditions," a market source said.

Citigroup and Deutsche Bank were the lead managers for the Rule 144A and Regulation S deal.

"The market tanked over in Asia and Europe, but it's better here [in the United States]," a market source said.

"Hopefully it'll continue on the upswing to a more stable market."

Eastern Europe jumps in

The Oblast of Samara region of Russia announced plans to sell 5 billion ruble five-year senior unsecured sovereigns (Aa1.ru) with a fixed coupon.

The local economy is still subject to the deteriorating financials of AvtoVAZ, a local car manufacturer and Samaraneftegaz an oil producer.

Semi-sovereign PKN Orlen proposed the issue of €1 billion of senior unsecured notes (Baa3).

And Romania's Telemobil announced it will issue $125 million seven-year bonds (B3).

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