Philippines steady near all-time tights; Emirates Islamic Bank prices sukuk; local markets mixed

By Paul Deckelman and Aaron Hochman-Zimmerman

New York, June 1 - After a mid-week reaction to the Chinese trade-tax hike, emerging markets were slow but stable, according to a buyside source.

"The market is a little fragile, but I don't see what will push it lower," the investor said.

The source remarked that EM remains strong, but does not envision a rally near at hand.

Notably, Philippines debt and credit default swaps held near their all time tightest levels.

Meanwhile in primary action Emirates Islamic Bank priced a $350 million Islamic bond in the middle of talk.

Brazil bonds get currency boost

In the secondary market, local-currency denominated bonds were seen higher in some markets, as those currencies moved upward for a variety of reasons.

In Brazil, for instance, the benchmark zero-coupon real-denominated bonds due 2008 were seen firmer, their yield tightening by some 5 basis points to 11.33% late in the session, even as the rampaging real continued to roll, pushing up to the kinds of levels versus the U.S. dollar not seen in almost seven years.

The currency - which stood at more than 2.25 to the dollar a year ago, but then since strengthened as the nation's economy has caught fire - last month punched below the psychologically potent 2-for-a-dollar mark, and finished Friday's dealings quoted at 1.9050 to the dollar.

That was considerably improved from 1.928 to the dollar on Thursday - and at one point during Friday's session, it actually moved to an intraday peak level versus the greenback of 1.8991, its strongest showing since the fall of 2000. Put another way, while the real was worth about 44 U.S. cents a year ago, it now is worth 52 cents.

The real has lately been one of the strongest performers versus the dollar, and rose some 2.4% this past week alone.

The real rose on speculation that steel making giant Arcelor Mittal was buying the currency to use to pay off the shareholders of its Arcelor Brasil SA subsidiary in a nearly $4 billion buyout that will give the Luxembourg-based parent full ownership of the Brazilian unit - letting it reap the rewards of being the major steelmaker in Latin America's largest and most vibrant economy.

Mexico off, but spread narrows

However, in Latin America's second-biggest economy, profit-taking was seen bringing Mexico's peso-denominated bonds down a little from recent peaks, even as the currency unit strengthened Friday to a seven-month high against the buck.

While yields on Mexico's peso-denominated debt have come in considerably over the past week or so in the wake of investor optimism about president Felipe Calderon's plans to revamp that country's tax code, boosting prices on the bonds accordingly, on Friday they widened out a bit, and the price on its 7¼% local-currency-denominated bonds came down about 1/3 point to the 97.5 range. The yield rose by about 5 bps to 7.60%.

However, even with that slight retrenchment, the bonds' yields are still in some 15 bps from where they were, say, 10 days ago.

And even though the yield widened a little on Friday, spreads against the comparable U.S. Treasury issues narrowed to an average 259 bps as Washington's bonds fell sharply in the wake government data showing that the U.S. created considerably more jobs in May than Wall Street was looking for, while manufacturing unexpectedly picked up. The yield on the 10-year Treasury ballooned out to its highest level since last August, at 4.95%.

Rate hike risk roils rand bonds

In other markets, South Africa's rand-denominated bonds were seen in retreat Friday amid investor worry that recent economic data may cause that country's central bank to push up interest rates to combat inflation.

The market had already priced in expectations that the Reserve Bank of South Africa might cut rates later in the year - but after Pretoria reported on Thursday that consumer prices had shot up by an unexpectedly wide 6.3% in April, economists scrambled to revise their interest-rate projections.

Now a consensus seems to have emerged that the bank's policy-setting committee - similar to the U.S. Federal Reserve's FOMC - could announce a boost in key rates when it meets on Thursday.

That pushed the country's widely-tracked R153 bond's yield up to 8.513% from Thursday's close at 8.410%.

The widening trend was seen across the curve, with the short-term R196 notes' yield moving up to 9.105% at the close of local trading from 8.820% previously, and the longer-duration R157 widening out to 7.0848% from 7.0710% on Thursday.

Philippines paper steady

In Asia, Philippines bonds were seen pretty much steady, with the benchmark 2031 government paper quoted at 113.375 bid, 113.75 offered, and the 2032 sovereigns seen at 97.5 bid, 97.75 offered, both little changed.

Five-year credit default swaps contracts on Manila's debt were quoted at 99-101 bps. The bond prices were just below their recent all-time highs, while the CDS were near all-time tight levels.

Lingering unease about China

Elsewhere in Asia, CDS contracts linked to China's sovereign paper widened somewhat to 12-14 bps on lingering unease about the safety of investments in that country following the big - though relatively short-lived - stock market downturn earlier in the week.

Turkey bonds up on currency

Turkish bonds were seen stronger, with the yield on that country's 2009 benchmark bonds declining to 18.38% - considerably narrower than Thursday's 18.54% and Wednesday's 18.57%.

The bonds rose as the Turkish lira firmed to its strongest level versus the dollar in 14 months, given a boost by ample liquidity and an easing - for now, at least - of the nation's recent political tensions.

Emirates Islamic Bank sukuk

In Friday's primary market session Emirates Islamic Bank priced a $350 million 5-year senior floating-rate trust certificate sukuk (A1/A) at par to yield Libor plus 30 basis points.

Standard Chartered Bank and Emirates Islamic Bank were joint lead managers for the deal, which hit the market within earlier yield talk of Libor plus 29 to 32 bps.

In the upcoming week, Kuwait Financial Centre Markaz is expected to come with a $100 million five-year floating-rate sukuk deal via DIFC Investments.

Kiev to sell €300 million

Also expected to price notes during the June 4 to June 8 week is the City of Kiev.

The €300 million offering, via Citigroup along with Deutsche Bank and UBS, is talked at 7.2% to 7.5%.

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