Emerging markets bonds drop, then recover; Brazil, Argentina higher; primary motionless

By Paul Deckelman and Aaron Hochman-Zimmerman

New York, Aug. 10 - Emerging markets went on a roller-coaster ride on Friday, following along with U.S. and other equities, which first fell sharply, propelled by the negative momentum seen during Thursday's rout, but then came off their lows later in the session to pare those losses and even notch some gains after the Federal Reserve, the European Central Bank and other important central banks pumped well over $100 billion into the international financial system in hopes of calming investor fears about a worldwide credit crunch sparked by the U.S. subprime mortgage lending debacle.

A trader saw stronger performance by Brazilian and Argentinean bonds, but not much improvement overall from Venezuela and Ecuador.

In Asian trading earlier, Philippines government paper was lower and the cost of hedging against a default via credit default swaps contracts considerably higher.

Those big cash infusions from the Fed, the ECB and the central banks of Japan, Australia and Canada, reassured equity players sufficiently that the Standard & Poor's 500 more than made up for its early 1.6% deficit to end up 0.55 at 1453.64, while the Dow Jones Industrial Average slashed what at one point was a 213-point loss to just 31.14 (0.2%), finishing at 13,239.54. The Nasdaq Composite Index slipped 11.6 (0.5%) to 2544.89. While stocks were battling their way back from big early declines, U.S. Treasuries - which had firmed robustly on Thursday - were surrendering Friday's early flight-to-safety gains, as the yield on the benchmark 10-year notes ended up rising 2 basis points from its Thursday close to 4.80%. The yield on the more interest-rate sensitive two-year Treasuries rose 1 bp to 4.46%.

The key gauge of investor tolerance or avoidance for risk, the spread between average U.S. Treasury yields and emerging debt yields as measured by the JP Morgan & Co. EMBI+ index - which had ballooned out by some 9 basis points during Thursday's blowup - started the day on that same widening trend, first adding on 4 bps during the Asian trading day, and then tacking on about the same amount in initial dealings during the North American trading day.

But after the central banks charged in to pump up financial market liquidity - the Fed injected first $19 billion, then $16 billion, then another $3 billion, on top of the $24 billion it put in on Thursday, while the ECB injected some $83.6 billion, on top of Thursday's whopping $130 billion - debt investors apparently took heart, and spreads tightened. By the end of the day, the average EMBI+ spread stood at 203 bps, actually down 1 bp from Thursday's finish.

Latin debt seen up late in day

The market "was trading very well here at the end of the day," said a New York-based trader in Latin American debt. "It was very resilient. We had buyers for most LatAm paper, and we're closing on the highs for the day."

He cited the impact of "the Fed, Treasuries ending a little weaker, with stocks closing unchanged. People had faith in credit again, and they're buying LatAm paper."

Among notable sovereign names that stood out, he said, "Brazil was very strong, closing up about ½ point from their lows." He saw that country's benchmark 11% dollar-denominated global notes due 2040 - considered the most liquid and the most widely traded emerging markets debt instrument - finishing at 130.5 bid.

The volatile, risky high-beta names in the region - whose bonds had firmed smartly during the market rebound earlier in the week, only to nosedive into the tank during Thursday's selling binge - "didn't perform as well" as the more highly regarded names like Brazil.

Although he saw Argentina's bonds as "an outperformer, Venezuela kind of did nothing."

He saw Venezuela's dollar-denominated 9¼% benchmark bonds due 2027 holding steady around 104.5. Fellow high-beta name Ecuador's 10% dollar-denominated globals due 2030 - which had firmed earlier in the week on Venezuelan president Hugo Chavez' offer to buy between $500 million and $1 billion of Quito debt - were at 87.25 bid, he said.

At another desk, however, those bonds were being quoted down 1 point on the session at 86, while the Venezuelan bonds were also seen down a point, at 103.

The first trader said that Latin American bonds "kinda moved around with the Dow [Jones Industrial Average] for the most part, [first] down 200, now it's closing [almost] flat." So, he said, "in the early morning, we were pretty much on the lows, and now we're closing pretty strong, so we're doing okay."

He further saw "a decent amount of activity for a Friday in August - not excessive, but we kept busy all day."

Elsewhere in Latin American debt dealings, a market source saw Argentina's spread versus Treasuries, as measured by the EMBI+ index, having narrowed by a hefty 33 bps from the previous session, after having widened substantially the session before, in Thursdays market rout.

Local currency Latin bonds weaker

Brazil's locally traded real-denominated bonds were seen having eased slightly on the session, even as the real came in a little, the bonds' yield quoted up 2 bps to the 11.16% level.

Colombia's locally denominated peso bonds were off, with the 11% notes due 2020 quoted having fallen about 7/8 point to just above the 106 level, as the peso also retreated on investor concerns about market liquidity.

And Mexico's 10-year peso bonds were seen down more than 1/3 point, quoted just below the 101 level.

Asian issues in retreat

Earlier Thursday, during the local Asian trading session, ahead of the opening of the North American markets and, in Friday's case the interventions of the Fed and the other central banks, market participants scrambled to sell bonds.

The Philippine government benchmark bonds due 2031 fell 1½ points on the session, quoted at 107.75 bid, 108.5 offered, while its 2032 paper was off nearly a point at 95.375 bid, versus 96.25 the day before.

The cost of five-year credit default swaps contract used to hedge against a default in those government bonds were seen to have shot up to 193/200 bps, up from 180 bps late Thursday in New York and well up from levels around 150 bps during Thursday's Asian trading day - before the bottom dropped out of global debt markets.

Primary stays quiet

As the sky was falling across various market sectors, the primary market was rained out for yet another day.

"Really quiet ... nothing to report," said an emerging markets syndicate official who is optimistically keeping crossed fingers in the hope of a better September.

"I haven't even looked at the screen," joked another syndicate official about the lack of action in the emerging markets.

"Everyone's just waiting for it to pass," the official said about the U.S. subprime crisis and all that has precipitated from it.

"EM's been OK, there's widening because of the Treasury rally," the official said. "Prices have held up pretty well."

This past week equities have held attention as the prime mover of action in emerging markets.

"It's all about equities in the U.S," another syndicate source said, "emerging markets are just following."

"I think we're being pretty well behaved," the source added about emerging markets' relative stability.

Optimism over emerging markets' future is still easy to find, but the naysayers are growing in number.

"Fear has greatly overtaken greed, and there is the fear that a crisis is imminent within the next six months or the next 12 months," a market source said.

The scare resulting from the injection of cash into the market from central banks across Europe, Asia and the United States has given new issuers even more of a reason to keep their bonds on the back shelf. As of yet, the reluctance to bring new issues only seems to be a temporary condition, which most expect to have run its course by fall.

Still those issuers who need to raise cash in the short-term are in a difficult position.

"Whoever tries to come out now is going to get punished - big time," said a syndicate desk official.

Issuers "are going to be charged a huge premium. No one in their right minds would come out like this ... No one will want to put their liquidity to work," the official added.

The official wondered if the arrival of September could actually be the quick fix that the market needs.

"Twenty days will be enough?" the official asked.

"I would love it if it would be September, but I'm not sure.

"Apparently the market has not finished repricing different asset classes," the official said.

There is also concern amongst investors that there will be a large backlog of supply if fall does calm investors' nerves.

"There is some concern that - given the fact that much of Europe is on extended holiday - there may be pent up selling that will be unleashed in September, should the current negative environment persist," an emerging markets analyst specializing in Latin America said.

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