Global economic woes, London holiday hamper EM activity; Brazil's Banco Pine puts off deal

By Christine Van Dusen

Atlanta, June 4 - As Queen Elizabeth II led a flotilla down the River Thames in London during a wet and cloudy Diamond Jubilee celebration on Monday, activity for emerging markets bonds - already hindered by the ongoing European economic crisis - had all but dried up.

"It's slow here, mostly because London is closed, so we didn't have any European market movements leading into the North America open, to get us moving," a New York-based trader said.

Add to that the falling price of Brent crude oil, as well as recent weak economic data from the United States and China, and emerging markets bonds had a rough go on Monday.

"May U.S. non-farm payrolls released on Friday were significantly worse than expected," according to a report from Erste Group. "Investors' global growth expectations have been revised lower as a result."

The resulting increase in risk aversion is taking its toll on Central European assets, with credit default swaps on the region's sovereigns climbing 10 basis points to 45 bps, week over week, the report said.

The stress in the European bond markets shows no signs of letting up, according to a report from Barclays Capital Markets.

Investors have been looking for better international flows from Spanish bond markets and further intervention from the European Central Bank. "Unfortunately, none of these has yet to come to pass," Barclays said.

Spanish 10-year yields have widened, bank recapitalizations have reached a new high, and little new action has been taken to support the European banking system, the report said.

"The market is oh-so-painful," the New York trader said.

BBB names in demand

In trading on Monday, some demand was noted for BBB-rated names like Brazil, Mexico and Peru, a New York-based syndicate source said.

"They are all well-bid, in terms of dollar prices," he said. "They're widening versus Treasuries, but we're seeing demand."

Even some corporate issuers from those countries were faring fairly well. The recent $500 million issue of 5 7/8% notes due 2022 from BRF Brasil Foods SA was oversubscribed, a market source said.

The Brazil-based food processing and beverage company's notes priced June 1 at 99.07 to yield 6% via bookrunners BB Securities, Itau BBA, HSBC and Santander in a Rule 144A and Regulation S deal.

The final book was about $1.66 billion, a market source said.

"Quality stuff is pretty well bid," the syndicate source said. "I think a real washout trade occurred about seven sessions ago, and since then the lower interest rate environment is just giving some bonds some traction."

Argentina gets shunned

However, the market on Monday was, overall, very choppy, the syndicate source said.

And some once-lauded names are taking a hit, he added.

Investors were at one point happy to embrace bonds from such issuers as Argentina and Venezuela, but even those notes are now getting the cold shoulder.

"They couldn't get enough of it when it was 10 points higher," he said. "Now you can't touch it with a 10-foot pole. Nobody wants them."

Deal flow halts

Meanwhile, the primary market has stalled, market sources said on Monday.

"Forget it - no one's going to do anything there," the syndicate source said. "The new issue market is kind of closed for now."

Indeed, some issuers that were poised to bring new notes to the market are backing away. Case in point: Brazil-based lender Banco Pine postponed plans for a CHF 80 million-minimum offering of 21/2-year notes due to market conditions, a market source said.

UBS was the bookrunner for the deal, which was talked at a spread of mid-swaps plus 493 bps.

"You just need some sense of stability in the global markets if you're going to issue," the syndicate source said. "And it's just not there. It's one piece of bad news after the next."

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