Market mostly mixed; Standard Bank prices $500 million; Argentina, Brazil higher in trading

By Aaron Hochman-Zimmerman

New York, Aug. 21 - In the primary one deal was able to price as a half-hearted optimism still dominates the market. Standard Bank of South Africa, plc sold $500 million but its example was not enough to indicate a true recovery for yet another day.

In trading, emerging market bonds were seen generally mixed to mostly firmer on Tuesday, although no one trend - either positive or negative - was predominating.

While the day's action opened in Asia with bonds heading lower, carrying through on the negative momentum seen late in Monday's session, market rumors that the Federal Reserve might step in with another interest rate cut initially got some participants enthused, although that excitement waned when no such rate cut was forthcoming.

However, hopes of Fed action, if not necessarily on Tuesday, did give a boost to U.S. and other stock markets, and that in turn encouraged some emerging bond market players, since equities, EM and high yield are often lumped in together as perceived risky asset classes. At the same time, the sharp fall in three-month U.S. Treasury bill yields seen on Monday as part of an investor "flight to safety" largely reversed itself Tuesday, signaling to market participants that it might be safe to venture into other areas besides U.S. government paper, the standard of stability and safety in the international debt markets.

Argentina's volatile bonds were seen better by the end of the session, shaking off early weakness. Brazilian debt was also seen having firmed up as the session went on.

Earlier in their home markets, Turkish bonds, and South African paper were seen lower. The cost of hedging against a possible default in Philippines paper using credit default swaps contracts increased. India's bonds were up - and Merrill Lynch sees them continuing to rise as inflation is held in check.

While the yield on the three-month U.S. T-bill, considered the safest and most liquid investment because of its short tenor, was up by 48 basis points during the session to 3.57% - largely reversing Monday's 66 bps plunge, its biggest drop since the 1987 Wall Street crash - other Treasury instruments rose in price, with the yield on the two-year note falling 6 bps to 4.02% and the benchmark 10-year note's yield declining 4 bps to 4.59%.

That helped to push average spreads between Treasuries and EM debt, seen as the key measure of investor risk tolerance or aversion, somewhat higher. The EMBI+ index compiled by JP Morgan & Co. widened 3 bps to 244 bps.

Argentina, Brazil on the upside

But while some EM spreads were seen higher, bond prices for some issues did improve. For instance, high-beta credit Argentina's bonds - which had led Monday's downturn - were better Tuesday, with its average spread versus Treasuries narrowing 4 bps to 488 bps, and that on a day when the EMBI+ had average spreads mostly going up by several basis points.

Meanwhile, Argentine CDS contracts initially rose as much as 5 bps to 542.5 bps but ended the day having come back down to end unchanged at 537 bps.

Among the other members of the volatile high-beta trio - Argentina plus Venezuela and Ecuador - average EMBI+ spreads for the latter two widened out, even as the underlying bonds were mixed, with no clear trend. Venezuela's 5¾% global bonds due 2016 firmed a bit to just above the 79¾ level as their yield fell 6 bps to 9.17%.

Among the steadier Latin American credits, Brazil's benchmark 11% bonds due 2040 were up ¼ point at 130 bid. Its 7 7/8% bonds due 2015 firmed slightly to 110.

Turkish debt moves lower

Outside of Latin America, Turkey's bonds, particularly its dollar-denominated issues, were on the slide, with the average spread on the country's debt versus Treasuries seen having widened out by 8 bps on the EMBI+ to 239 bps.

While the current presidential election balloting by Parliament is not expected to have much impact on the behavior of the bonds - Turkey-watchers say the markets have pretty much factored in the likelihood that foreign minister Abudullah Gul, seen by some critics as an Islamist, is likely to be elected president with the support of his ruling AK Party - the situation could deteriorate should the country's military, which sees itself as the guardian of the state's secular nature, attempt to intervene in the process, as has happened several times in the past.

Even apart from the political situation, Turkey's high-yielding bonds, while aiding the country's capital flows by attracting investors, could be vulnerable to any sudden trend of risk-aversion in the capital markets, as happened last week.

South Africa eases

Elsewhere, South African bonds ended a bit lower, with the yield on the benchmark R153 bonds due 2010 rising to 9.25% from 9.215% on Monday, the yield on the long-term R157 bonds due 2015 increasing to 8.5% from 8.45%, and the yield on the short-term R196 bonds moving up to 9.515% from prior levels at 9.47%. However, a short squeeze helped to limit the bonds' downside and put a prop under prices.

Philippines CDS costlier

In the Far Eastern markets earlier on Tuesday, bonds were seen easier and spreads wider in thin, nervous trading on market unease about the likelihood that the debt crunch spurred by the problems of the U.S. subprime mortgage industry could spread further.

CDS on Philippines sovereign debt - considered the most liquid and widely traded in the region - widened out by about 3 or 4 bps on the session to around the 202 bps area.

India up, lower yield forecast

However, one Asian name seen better was India, whose bonds hit their lowest yields in nearly two weeks, helped by equity market gains, as well as by Merrill Lynch's prediction that the yield on the benchmark 10-year rupee-denominated bonds, now hovering just under 8%, could fall to 7.75% by the end of March, when the new fiscal year begins. The investment banking giant sees the country's central bank keeping interest rates unchanged due to a moderate slowdown in the economy, which is holding inflation in check below its 5% target. Merrill Lynch says those 10-year bonds should return a total of 6.3% to investors by the time the fiscal year comes to a close.

Primary still hesitant

"It's been pretty flat, the [JPMorgan EMBI+] index is only wider by 3 [bps]," said a buyside source.

"Things are still looking rocky at our end," said an emerging markets syndicate official specializing in emerging Europe and the Middle East.

"My fingers are crossed that things improve after the summer," the official added.

Investors and analysts have been giving Federal Reserve Bank chairman Ben Bernanke rave reviews after the recent Fed rate cut.

Unfortunately, substantial help from the changes will take time to assert themselves on the market, a market source said.

"The changes to the discount window will eventually shore up confidence, stem the run on the financial system, and allow the debt markets to stabilize," another market source said.

Others are concerned that actions from the world's central banks have treated a symptom, but not the underlying problem behind the current crisis, a market source said.

Without addressing the wider liquidations and credit risk aversion, there may be further trouble in the future, the source added.

Another market source expects buying to begin as the credit market rebounds, particularly in Asia, the source said.

Asian banks have been able to steer clear of overexposure to U.S. subprime woes, the source said.

Standard Bank prices $500 million

Standard Bank of South Africa was able to price $500 million five-year floating-rate senior unsecured notes (//A-) at Libor plus 4 basis points.

Standard Bank had the books for the deal.

The notes, due on July 30, 2012 were issued under Regulation S.

Standard Bank is a Johannesburg-based commercial and investment bank.

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