Emerging markets inactive near holiday; bonds up a 'bit;' risk appetite increases

By Christine Van Dusen

Atlanta, Dec. 23 - Emerging markets behaved as though they had closed up shop on Wednesday as issuers and investors headed into the Christmas holiday and prepared for the end of 2009, market sources said.

"Everyone's gone," an emerging markets strategist said. "There are no rumbles. The stock market is flat, so clearly nothing is happening."

With sales of new U.S. homes falling about 11% in November to their lowest level since April and consumer spending rising a less-than-expected 0.5%, Treasury prices remained low and the yield curve stayed steep, reflecting a sense that investors are becoming more comfortable with riskier assets.

"Bonds are up a little bit," a market source said. "Investors have been feeling more and more confident about risk. They've been looking for a reason to feel otherwise but they just can't find it. The only issue may be valuations being a little overdone, but even that's not necessarily a reason to sell, not until everyone believes the same thing."

But this doesn't mean investors are willing to take big gambles at this time of year, the strategist said. "Nobody's going to take any positions now, ahead of the New Year."

It could be a different story come January, though. That's when the Dominican Republic is expected to come to market with a benchmark-sized dollar-denominated offering of sovereign global bonds via Barclays Capital and Citigroup and Latvia could finally launch a euro-denominated offering of notes via Citigroup and Credit Suisse.

"They've been trying to come to market for some time," the source said. "It's a little late now."

The New Year could also bring issues from the Philippines and Pakistan. The latter will "probably issue first thing in the year," the strategist said.

Record inflows for October

Also on Wednesday, data service EPFR Global released a report on inflow trends for emerging markets bond funds, noting that the fund group in October posted its biggest monthly inflows since the company first started tracking cash flows in the first quarter of 1995.

Investment "found its way into some of the riskier markets," with "average allocations for Russia, Argentina and Venezuela all climbing during the month," according to EPFR's report. "Argentina regained its position among the 10 biggest country allocations for this fund group."

Net buying of Venezuela "hit its highest level since first-quarter 2007," the report said. "Emerging Europe's average weighting jumped to a 14-month high as Russia supplanted Mexico as the second-biggest country allocation going into December."

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