Emerging markets push lower again; Venezuela, Argentina lead drop; National Industries prices sukuk

By Paul Deckelman and Aaron Hochman-Zimmerman

New York, Aug. 15 - Emerging market bonds continued to fall on Wednesday as continued investor worries about the depth of the credit crunch sparked by the U.S. subprime mortgage lending meltdown pushed market participants to vote with their feet and head for the high ground of U.S. Treasury issues.

Once again, the volatile bonds of Venezuela, Argentina and Ecuador led the way downward as investors focused on new political problems there. But even the more stable names like Brazil got hit.

Outside of Latin America, Turkey's bonds were lower as investors pondered the latest political situation in the country, where secularists vow to resist any efforts to increase Islam's influence. In the Far East, Philippine government debt continued to retreat, while the cost of credit default swap contracts increased.

South Africa's bonds eased ahead of Thursday's meeting of that country's central bank governors, who are expected to raise interest rates - however, those bonds did end only modestly lower, having firmed somewhat from their session lows earlier.

In the suffering emerging market primary, Venezuela and Argentina accepted offers for the last day Wednesday for their third add-on to their Bono del Sur. Meanwhile National Industries Group was able to price a $475 million sukuk.

Bono for the locals

The Bono del Sur cannot help the larger emerging markets which "took a beating today," said an emerging markets syndicate desk official. The local bonds only have sway in their own market where liquidity is still relatively high.

"It's not positive or negative ... Good for Argentina, good for Venezuelan investors," the syndicate official said about the deal.

The broader market would not have been accommodating to the local issue.

"At these levels they wouldn't be able to sell it to the market," the syndicate official said.

In trading, investors may have their sights set on the region and may begin "stepping into these LatAms again," said another syndicate desk official.

Brazil's 40-year notes were down just ¾ point and held above 130 basis points for most of the day.

"We have some buyers back in the market; the levels are quite attractive," the syndicate official said.

Although, "I don't see people coming in for bottom-fishing," the other official said, adding "I fully expect Asia to open negative [Thursday]."

Overall, many investments are too speculative to buy for those who hope to be able to exit at a higher price anytime soon.

"You need to have cash enough to stay in the investments; you have to go through it," a syndicate official said about the current market's unpredictability.

"Buy and hold it for the next month to a year," the official added.

National Industries prices sukuk

National Industries Group priced $475 million of five-year unsubordinated notes (Baa2) at par to yield Libor plus 105 basis points.

BNP Paribas, Citigroup, Standard Chartered, Watani Investment Bank, and WestLB had the joint books for the deal.

The sukuk due in August 2012, is part of a $1.5 billion sukuk program.

National Industries Group is a Safat, Kuwait-based investment bank.

Treasuries up, EMBI+ wider

Continued investor worry about the depth and breadth of the damage done to the credit markets by the subprime mortgage debacle manifested itself Wednesday in sharply lower global equities as participants continued to steer clear of riskier asset classes, which include stocks, junk bonds and emerging markets debt. In U.S. markets, the S&P 500 lost 19.84 (1.4%) to 1,406.70, erasing the last of the 2007 gains it had accumulated, while the Dow Jones Industrial Average fell 167.45 (1.3%) 12,861.47, the first time since April that the 30-issue market bellwether has dipped below the psychologically potent 13,000 level. Conversely, that flight-to-safety reaction made U.S. Treasury issue more attractive, with the yield on the 10-year notes decreasing 2 basis points from Tuesday's levels, to 4.70%.

That combination of lower emerging markets bonds and better Treasuries pushed up spreads of emerging debt over Treasuries - the key measure of investor risk tolerance or aversion - with the widely followed EMBI+ index compiled by JP Morgan & Co. showing average emerging spreads having widened by 8 bps to 223 bps.

High betas move market lower

However, while the market was generally lower, it was "a little shaky - but very differentiated," noted Enrique Alvarez, head Latin American debt strategist at IDEAglobal, an international financial research company.

He said that the real bloodletting has been among the volatile bonds of Latin America's Gang Of Three - Venezuela, Argentina and Ecuador - with relatively limited impact in other names in the region.

"You've had very negative political news rolling out of Venezuela and Argentina. That's why those credits have been pummeled. Ecuador had gotten way ahead of itself, and that's why you've seen the sharp pullback. So there's the Trio of High Beta - and that's why they're underperforming."

On the other hand, he said, "if you look to the broader markets, the better-rated credits are still behaving quite above and beyond what you would expect them to be doing, given the circumstances going on externally."

The strategist cautioned, however, that such a bifurcation could not last indefinitely, given the weakening of the overall debt markets. "I think that needs to change at some point in time, because as you look at domestic markets, obviously, there's a panic trade that's developing."

Venezuela is vanquished

Venezuela was "getting killed," Alvarez declared, with that country's benchmark dollar-denominated 9¼% bonds trading down 3¾ points to 99 bid, 100.30 offered, while its yield blew out by 39 bps.

"You see new relative lows in their bond prices, and that's because [Venezuelan president Hugo] Chavez apparently is going to push forward some constitutional amendments which would allow him to be re-elected indefinitely. This was a known element for the market, but it's just about officially on the table."

Alvarez noted that Chavez is also proposing measures that would likely result in a reduction of independence from the government of the country's central bank. This was something the market was not comfortable with at all some time back, and it now comes full circle - it looks like it's going to turn into a reality, and that's another very large negative.

The cost of hedging against a default on those bonds rose to 455 bps, up 57 bps on the day.

Argentina, Ecuador, Brazil off

In Argentina, Alvrez said, "you have a 12½% increase in pension payments that has been announced today - this is just another in a long line of very troublesome actions by the government related to expenditures, and then you have the ongoing problem of transparency in the inflation readings, and of course, corruption allegations related to the government" that forced the recent resignation of the nation's economy minister.

He saw Argentina's Discount bonds due 2033 off nearly 3 points on the day to 80.5 bid, 81.5 offered, with its yield ballooning out by 31 bps.

At another desk, the Argentina 8.28% bonds fell 2½ points to 81, with the yield up 29 bps to 10.20%. CDS on Argentina's debt widened by 63 bps on the day to a record 505 bps.

Alvarez said that Ecuador's bonds "were over-extended, so it's just paying for being too rich in price and spread terms earlier this week."

He saw its benchmark 10% bonds due 2030 fall to 82 bid, 84.5, with the yield moving 26 bps wider.

Brazil had "a soft close," Alvarez said, with its 2034 global bonds ending at 118.5 bid, 119.20 offered, which was off 1.80 on the day, and a 10 bps spread expansion. The country's widely traded 11% benchmark 2040 bonds lost ¾ point to 129.20 bid, 129.30 offered, with a 4 bps rise in the bonds' yield.

Turkey, Philippines debt down, CDS up

Outside of Latin America, Turkey's spread over Treasuries widened 10 bps on the EMBI+ to 228 bps as investors continued to fret about the possibility that foreign minister Abdullah Gul's entry into the country's presidential race as the candidate of the ruling AK Party might provoke a backlash from Ankara's military, which is staunchly secular and views Gul warily, with some critics believing he could have an Islamist agenda.

The cost of 5-year CDS swaps rose 20 bps on the day to 215 bps.

In the Philippines, the government's benchmark 2031 bonds lost ½ point during the Asian trading day to end at 107.l375 bid, 107.75 offered, while its 2032 bonds were also ½ point down at 95.5 bid, 96 offered.

The cost of the 5-year CDS contract on Philippine debt jumped to 192/197 bps, about a 10 bp widening from Tuesday.

South Africa bounces off lows ahead of bank meet

South Africa's bonds ended lower on the session, although those bonds did come off the session lows seen earlier in the local trading day and ended only moderately off Tuesday's pace.

The yield on the key R153 bond due 2010 was at 9.285%, only up slightly from its previous close of 9.280%, having come in from its early-session yield at 9.34%, while the short-term R196's bid yield ended at 9.56%, slightly wider than its previous close of 9.535% but well down from 9.605% earlier in the session. The longer-term R157 bond due 2015 ended with a slightly wider yield of 8.53% versus 8.525% before, though that yield was well down from 8.575% in the early going.

Observers attributed the late snapback from the earlier lows to position squaring ahead of the central bank meeting, short covering and some preemptive coupon interest.

The Reserve Bank governors are expected to up the nation's key interest rate by as much as 50 bps to 10% as a precautionary anti-inflation measure, although this is expected to probably be the last tightening move in a cycle that began in June 2006, which has seen rates gradually rise by 300 bps in that time. The expected increase will take the prime overdraft rate to 13.5%.

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