Spreads widen sharply; Argentina leads losses; Gazprom waits to price; primary near dormant

By Paul Deckelman and Aaron Hochman-Zimmerman

New York, July 26 - Emerging markets saw a drastic widening out of spreads versus U.S. Treasuries on Thursday, both for EM in general and in the debt of many specific countries, notably Argentina, as Treasuries surged and emerging bonds fell as investors increasingly shunned riskier asset classes.

It was the fifth consecutive daily downturn for emerging market debt as a whole.

Jittery investors also pushed up the price of credit default swaps. Again, Argentina was seen leading the way, with Venezuela not far behind, but even as steady a performer as Brazil was dragged along.

In Asia, Philippine government debt - which has recently been taking it on the chin as sellers emerged for the very liquid and widely traded issues - actually bucked the generally negative trend to hold steady, while the CDS spreads were actually trading inside of the levels they had touched during Wednesday's headlong slide.

The primary market took an unscheduled holiday as Russia's OAO Gazprom still sits poised to price.

The eerie quiet in the emerging markets gave investors a chance to ponder unanswered questions about the world of the emerging markets.

"Who knows? [Emerging markets] could get a lot worse," a market source said about the near future.

Spreads are dramatically widening, the source added.

"I don't think anybody has a good read on it right now ... The whole market is in a very obscure state of mind, they don't know how much the subprime will affect the market, " said a buyside source.

Another subject to consider is when a powder keg of bonds from banks may explode into emerging markets.

"Banks are sitting on a lot of exposure right now," the buysider said adding that the backlogged capital is a harbinger of a very active fall season and eventually will "need to find a level to price."

The wide bid-ask spread in high yield has driven many to hedge their investments in emerging markets, which has made a "big impact," the buysider said.

Also, emerging markets trading driven by the CDX "came back a little bit" particularly Brazil and Venezuela toward the end of the day, a buyside source said.

Gazprom on the threshold

In a deal many have been watching, Gazprom set the maturity of its highly anticipated benchmark-sized dollar-dominated offering (//BBB-) at 30 years versus the 10-year issue which had been expected, according to an informed source.

The notes are being talked at 30-year Treasuries plus 220 to 225 basis points and are expected to price Friday.

"I'm not really concerned with who is printing what," said a source close to the deal when asked if market conditions may prevent the issuance. Persistent rumors have speculated the deal will be delayed but despite the chatter the deal has continued to move towards pricing.

ABN Amro and Morgan Stanley will act as bookrunners for the Rule 144A and Regulation S deal.

The Moscow-based oil company is 50.002% controlled by the Russian government.

"There's probably not much risk appetite," a buyside source said with the Gazprom deal in mind.

Investors flee risk

With Treasuries firming smartly, yields on that paper contracted markedly, as investors - still anxious about the damage the subprime mortgage lending debacle will do to the debt markets generally - got out of riskier asset classes like emerging market equities and debt, high yield bonds and U.S. equities and sought the relative safety of Washington's paper. The yield on the benchmark 10-year Treasury narrowed 12 bps to 4.78%, and yields on shorter, more liquid Treasury issues came in even more - the two-year notes tightened 18 bps to finish at 4.56%. The yield shrinkage was the biggest such daily retrenchment seen since 2004.

With the Treasury yields falling and most EM bonds lower, spreads had nowhere to go but up - and the spread between the average emerging issue yield and Treasuries, as measured by JP Morgan & Co.'s widely followed EMBI+ index, ballooned out some 26 basis points to stand at 222 bps, the highest risk premium in over a year. Still, that was a little better than the day's worst point.

Argentina bonds in free fall

Argentina was again the day's big loser for a third consecutive session, the overall 10-session fall in its bonds - already seen as among the riskiest of all EM instruments - exacerbated by the latest development in a months-long battle between the investment community and president Nestor Kirchner over the reliability of the economic numbers churned out by the official statistics bureau in Buenos Aires. Argentine debt was seen off 6.95% on the day, according to the EMBI+ index.

Its 8.28% benchmark dollar-denominated bonds due 2033 lost more than 6 points on the session, sliding to 83.5, while the bonds' yield zoomed 66 bps to 9.91%.

The country's 5.83% inflation-linked peso-denominated bonds due 2033 were seen having fallen 9 points on the session to 122.25, while the yield on those bonds widened out by 55 basis points to 7.50% - and at one point in intraday dealings, the bonds' yield had soared as high as 7.64% before pulling back from that peak level later in the day.

On average, Argentine debt's spread over Treasuries jumped 65 bps to 466 bps - the widest gap between the two since January 2006.

Besides being buffeted by the overall fall in EM debt globally, the markets were seen also reacting to Wednesday's announcement that the head of the government's national statistics institute, Alejandro Barrios, had resigned, and had been replaced by Ana Maria Edwin. That brought to a close a tumultuous three months in which Barrios headed the office, amid protests by his own staff and criticism in the media and from the investment community that under his guidance, the statistics institute had lost credibility. Back in the spring, Barrios was appointed to run the statistics bureau by Kirchner and then-economy minister Felisa Miceli - who recently resigned amid a probe into a suspicious bag of money found in her ministerial office - amid wide criticism that the government was putting a political functionary into the post to guarantee continued favorable inflation data. The allegations of official book-cooking for political purposes had begun some weeks earlier, when the person actually in charge of issuing consumer price data, Gabriela Bevacqua, was similarly forced out and replaced by a Kirchner appointee.

Lots of problems seen for Argentina

Argentina's debt has been the biggest lower in the EM sphere so far this year, with a deficit well into the double-digits percentage-wise, and the brouhaha over the validity of the government's statistics has been just one of a number of factors hammering those bonds down, according to Enrique Alvarez, head Latin American debt strategist for the IDEAglobal international financial research firm.

"Looking forward, you have an election on the horizon. You have a new economics minister that has not shed a positive light on the market confusion" regarding the statistics institute - "so there's a complication that's severe there."

"There are two different aspects" continuing to drive Argentine debt prices lower, he noted. "The domestic aspect has to do with the initial presentation of Cristina Kirchner [president Nestor Kirchner's wife, now a senator in her own right, considered the front-running candidate to succeed her term-limited husband in that office], in launching her candidacy, in which she has essentially said that she will just intensify the policies of her husband. There was the hope that there would be a different economic agenda, some sort of turn favoring more open markets - but that doesn't seem to be the case."

Alvarez noted that the Economics Ministry has not helped the situation "by to a certain extent putting up more doubt regarding the independence of the INDEC [the Spanish acronym for the statistics bureau's official name]."

Alvarez also noted that "on the external side, Argentina for a very long time had been a very long credit within the market, taking a long time to liquidate, and I think there are some market vehicles that are using this as a good short to defend, in a certain sense, the built-in profits in their positions in Brazil, Colombia and so on."

Venezuela also routed substantially

While Argentina led the way downward again for a third session, Venezuela was not doing much better - the spread on its debt versus Treasuries widening 55 bps to 3.86%, the broadest gap in nearly two years.

Venezuela's 5¾% 10-year dollar-denominated global bonds were quoted as having fallen more than 1¾ points on the day to below 84.20, while their yield soared 33 bps to 8.35%.

CDS on Argentine and Venezuelan debt were also reaching stratospheric levels on Thursday, with the five-year CDS contract on Argentina's debt pushing up to an all-time high level of 430 bps - a jump of more than 100 bps from Wednesday's levels - while Venezuela also hit a new high of 400 bps, up 91 bps on the day.

Brazil retreats moderately

Even the cost of a CDS contract for a relatively strong regional credit such as Brazil increased by 46 bps on the day to 142.5 bps, amid a general fall in EM and increase in investor default fears.

That same risk-aversion mode pushed the yield on the country's benchmark zero-coupon peso bonds up 7 bps on the day to 11.12%.

Philippines bonds, CDS steadier

But while Latin American debt was being decimated, some steadiness was seen in one of the more liquid names in Asian market trading, with the Philippine government benchmark 2031 bonds - recently hard hit as investors moved out of the widely traded sovereign issues - appeared to finally steady during the local trading day at 108.625, while Manila's 2032 bonds were quoted as having hung in at 94.875.

The cost of the 5-year CDS contract on that debt - which had ballooned into the mid-to-upper150 bps area on Wednesday, before finally settling in around 150-151 bps - was seen as having come in a little to 146-147 bps on Thursday.

MagnaChip plunges

Elsewhere among Asian credits, a trader saw South Korean computer chip manufacturer MagnaChip Semiconductor Ltd.'s 8% notes due 2014 down 6 points on the session at 64 bid, 65 offered. The company's 6 7/8% notes due 2011 were off 3½ points at 79 bid.

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