European economic uncertainty rules emerging markets; Argentina up; MTS, Malaysia on tap

By Christine Van Dusen

Atlanta, May 21 - Treasury yields rose then dipped on Friday and the euro gained ground, but the continued uncertainty about Europe's financial crisis drove investors toward less risky assets and away from emerging market bonds, sources said.

There was "a lot of volatility in terms of opening weaker, and then stronger and then going weaker again," a California-based market source said. "It's more related to risk aversion at this point than anything else."

Yields on 10-year Treasuries inched up 1 basis point to 3.22% during trading on Friday before declining to 3.21% by late afternoon, following last week's near-record lows.

"People sold all day, but not heavy," a Europe-based trader said. "Nobody knows what to do."

Given the continued economic turmoil in Europe, "the situation is very fluid," the California source said. "Uncertainty is the key."

Waiting for euro news

That uncertainty and the associated risk aversion wasn't much alleviated by Germany's decision on Friday to approve its €147.6 billion portion of the €750 billion bailout package for Greece and other troubled E.U. countries.

Nor were anxieties calmed much by the fact that finance ministers from E.U. countries met Friday to discuss ways to strengthen economic policies and behaviors in an attempt to contain the crisis and keep such turmoil from roiling the markets again.

Market-watchers were more focused on whether the European Central Bank would intervene to prop up the euro.

"There's still a lot of concern," the California source said. "It all depends on what happens over the weekend, if anything, in terms of the European Central Bank announcement."

Argentina, Venezuela move

Argentina was a mover in the secondary market, with bonds rising and the extra yield investors demand to own the bonds declining 23 bps, according to a market source.

This came against the backdrop of the sovereign's continuing debt swap, which offers a second exchange opportunity to bondholders who didn't participate in a 2005 swap. Argentina is aiming for 60% participation but had reached only about 45% in recent days. The deadline has been extended to June 7.

"Both Argentina and Venezuela were up on the day," the market source said.

On the primary side, Friday was "absolutely dead for new issues," the Europe-based trader said.

MTS, Malaysia could price

The May 24 week is expected to bring Russia-based mobile phone company Mobile Telesystems' planned 10-year eurobond issue via Bank of America Merrill Lynch, Credit Suisse, RBS. One trader said he'd heard the issue had been "postponed indefinitely," but a source close to the deal said it was still on a roadshow and moving forward.

The week could also see issuance from Malaysia, which is planning a five-year dollar-denominated benchmark-sized sukuk offering with HSBC and CIMB. That roadshow ends on Thursday.

But if the markets continue to perform as they have, it's possible new issuance will remain on pause.

"At this point, nobody knows what's going on," the California source said.

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