Hope for rate cut lifts Turkey; summer Friday sees EM largely unchanged; UkrSibbank prices $200 million

By Paul Deckelman and Aaron Hochman-Zimmerman

New York, July 13 - Friday saw prices on most emerging bonds pretty much unchanged, capping off a wild week which saw prices plunge and yields widen during the early part of the week as investors sought the safety of U.S. Treasury issues on renewed jitters about the impact the subprime lending industry meltdown might have - and then, when those concerns seemed to diminish later in the week, the investors came back in, lifting prices and tightening yields.

With yields on Treasuries seen essentially little changed on Friday's session - the 10-year note was pegged around 5.12% - emerging markets spreads over Treasuries were also seen little changed, widening perhaps 1 basis point to 165 bps, as measured by the widely followed EMBI+ market gauge compiled by JP Morgan & Co.

Venezuelan bonds and Ecuador's paper were seen continuing on the upside. Turkish bonds rose on the prospect of a reduction in the key interest rate by that country's central bank, as Turkey continues to make progress against inflation.

In the primary market, Ukraine's UkrSibbank priced $200 million while Banco do Brasil set the size of its upcoming deal at $200 million equivalent and Turkey's Global Yatirim set price talk at 9¼%.

Inflow streak continues

Meanwhile a meager $15 million inflow to the dedicated emerging markets bonds funds stretched a streak of positive flows to an even dozen weeks.

The year to date inflow total is $4.77 billion, which is $2.04 billion ahead of the $2.73 billion set at this point last year, according to EPFR Global.

Summer malaise

A New York-based trader in Latin American debt, particularly on the corporate side, said that the bonds in his sector had been better over past two sessions, given a boost by U.S. equities. On Friday, however, he said he saw a typical "summer malaise" session. Although here and there prices were firmer, these, he said, had occurred on "little or no volume."

Among the sovereign names, Venezuela's 9¼% dollar-denominated benchmark issue due 2027 was quoted up 0.20 to 110.30, while its yield came in by 1 or 2 bps to the 8.20% level.

Ecuador's bonds - like Venezuela's - are considered risky high volatility credits owing to continued political unrest in the Andean nation, and they are among the hardest hit when the market turns in a negative direction, while also posting large gains when the EM market improves. On Friday, the bonds firmed for a second straight day, their average spread over Treasuries seen about 3 bps tighter at 7.16%.

Another risky high-beta name, Argentina, was seen having dipped slightly Friday on profit taking off the sizable gains made during the previous several sessions. A market source saw the country's bonds off 0.30 point.

EM market bellwether Brazil's 11% dollar-denominated globals due 2040 were seen up perhaps 0.10 at 131.2. The yield fell 1 bp to 6.06%.

Brazil's real-denominated local bonds were meantime seen 1 bp tighter at 11.09%.

Turkey gains

Outside of Latin America, Turkey's lira-denominated local bonds got a boost after the country's central bank said it may start a "measured" lowering of the country's interest rates.

Yields tightened more than 10 bps to 17.l71%.

IDEAglobal's Alvarez sees spread compression

"More than anything, what we're seeing is sort of stagnated price action," declared Enrique Alvarez, head Latin American debt strategist for IDEAglobal, an international financial research company, "while spreads have actually compressed about 6 basis points overall."

He said that "the spread action comes amid [a backdrop of] basically no price movement. The market has been very, very flat most of the time, while the action that's been going on externally bounced off the market."

U.S. Treasury yields, he explained "have been bouncing around, moving a little higher, while EM did very little, so essentially that causes the spread compression."

He warned that looking forward, "you really have to doubt how long people can hold onto riskier investments, with the overall external environment very convoluted and perhaps not totally favoring higher-risk categories" - including emerging market bonds.

Alvarez takes issue with the assertions seen in much of the financial media that after the flight to safety by investors spooked by the continuing troubles of the subprime market - a move that pushed Treasuries up and their spreads down dramatically earlier in the week - the financial markets have now regained their tolerance of, or even appetite for, more risk and the fatter yields that go along with such risk-taking.

"I really don't buy that," he flatly declared. "What I do buy is that there seems to be a much more definitive move towards certain areas of the local [currency] markets within EM, Brazil being the prime example of that. But people are not willing to risk additional credit compression on the actual EM side, if we're talking about sovereigns."

The analyst reiterated: "I don't think there's tolerance for that out there - I think that [for that to be the case,] you would have to be inclined in one of two directions. Either you would have to say that U.S. Treasury rates are going to come off significantly - which is very difficult for that to occur, given the very large pressure that's building on the dollar. Or, you would have to say that overall there's going to be a much larger appetite for risk, and I don't see that happening again, at least on the external [debt] front."

Looking ahead to the coming week, Alvarez projected that "there will be a lot of different noise that will be coming from the U.S. side, and I think that will filter into the market."

He downplayed the likelihood of seeing "a high level of volatility on the sovereign side in EM - unless you have a very sharp move to the upside in the U.S. Treasury markets, or the Dow [Jones Industrial Average] comes off significantly. If either of those two factors is produced, I think you will have a little more clearing of positions overall within the EM spectrum."

Meanwhile, one market source also had doubts about the current market tone despite the positive moves after Thursday's gains in the equity market.

"There has been very low liquidity with trades going both ways," a market source said, but added that next week will bring inflation data along with other important economic indicators from Federal Reserve chairman, Ben Bernanke's upcoming speech.

"Things got a lot better since yesterday," said another market source citing Thursday's rally in stocks.

Citing the number of deals that got done in Thursday's session, he hoped it pointed to the beginning of a turnaround in the issuance cycle.

Banks dominate primary action

Meanwhile, banks were to the fore in Friday's primary market.

Ukraine's UkrSibbank sold $200 million three-year senior bonds (Ba2//BB-) at par to yield 7 3/8%, on the wide end of the 7¼% area price talk.

HSBC and BNP Paribas brought the deal to market.

Turkey's Global Yatirim Holding AS talked its $100 million five-year fixed-rate guaranteed loan participation notes (//B) at 9¼%. Deutsche Bank has the books.

Meanwhile, Banco do Brasil set the size of its Brazilian reais-dominated 10-year senior unsecured bonds (Baa3 expected) at $200 million. Price talk is 9½% to 9¾%,

BB Securities and Merrill Lynch have the books.

Interest on the 10-year notes will be converted into dollars on the relevant valuation date.

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