Greece concerns take toll on emerging markets; Russia, Argentina, Venezuela underperform

By Christine Van Dusen

Atlanta, May 6 - Greece's financial problems continued to take a toll on emerging markets on Thursday as investors worried the debt-saddled sovereign could default and its contagion could continue to spread, which sent yields lower and paralyzed the primary, market sources said.

"Everything is considerably weaker," a London-based trader said at mid-afternoon in Europe.

Yields on 10-year Treasuries fell 16 basis points to hit their lowest level since the end of 2009 on news that the European Central Bank will likely not buy Greek bonds, a move that would have helped calm fears about the market. The topic of buying government bonds didn't even come up at the ECB's meeting, market sources said.

Later in the day, yields fell further - to their lowest point since September 2008.

All of this made investors more wary about the planned €110 bailout of Greece by the International Monetary Fund and the European Union, even as the sovereign's government voted to approve the necessary austerity measures, including wage cuts and tax hikes.

Not even good economic news from the United States, where weekly jobless claims decreased and first-quarter productivity increased, could distract market-watchers from Greece's troubles and the resulting contagion effect.

Markets see volatility

Russia, for example, saw its five-year bonds - $2 billion 3 5/8% notes that priced on April 22 at 99.475 to yield Treasuries plus 125 bps - fall 3%.

And Argentina and Venezuela were "underperformers," a California-based market source said. It was the "same with Eastern European credits."

As another London trader put it: "It's total carnage."

By midday in New York, the market was "very choppy," according to a New York-based trader.

The JPMorgan Emerging Markets Bond Index Global Diversified Index was at 333 bps on Thursday, wider by 29 bps. And the Emerging Markets Bond Index Plus was at 324 bps, also 29 bps wider.

"It's very volatile today," the California-based source said.

In general terms "we're seeing a significant amount of unwinding of risk by several players in the market," a New York-based market source said. "There is some concern right now as to the reasons why equity markets have reacted the way they've reacted. However, the underlying problem we have in the market is Greece."

This, he said, "is creating a very difficult situation for emerging markets, which in itself is a market that has been trading at very tight levels across the board."

Inflows still rise

Even so, inflows into emerging markets bond funds didn't suffer for the week ended May 5. "Flows into EM bond funds were north of $1 billion this week," said Cameron Brandt, global senior analyst for data tracker EPFR Global.

"That's well above the long-term average," he said. "I think the better-quality EM credits are some of the best out there in terms of yield and the fundamentals underpinning them. So I think if the market has a sweet spot at the moment it is decent EM debt."

Primary hushed

The primary side was silent on Thursday. "I would imagine any new issuance would be on hold until we stabilize," a London trader said.

"There's no new issuance that I know of," the California source said.

In fact, at least one more issuer delayed a deal. Ukraine's Privat Bank is postponing its planned $500 million five-year notes due to current market conditions, according to a market source.

Privat Bank is a commercial lender based in Dnipropetrovsk, Ukraine.

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