Some names better but market eases off early gains; terms from Abu Dhabi; funds lose $19 million

By Paul Deckelman and Aaron Hochman-Zimmerman

New York, July 27 - Emerging markets bondholders tried to get off the canvas Friday after having been hammered down over several straight sessions - particularly Thursday's bloodbath.

A better tone was seen in some issues, as the market tried to focus on signs that the widespread fears the U.S. subprime lending meltdown might contaminate other debt markets may have been overblown.

Participants took some heart from statistics showing continued growth in the U.S. economy - the prime export market for industries in many emerging countries.

However, by day's end, some of the earlier gains had faded, with Brazil's paper seen ending easier, and Argentina's battered bonds adding to their previous losses. But Mexico's debt got a boost as that country's central bank held interest rates steady. Oil exporter Mexico was also helped by a rise in crude petroleum prices, as were Venezuela and Ecuador.

In the primary market, bellwether OAO Gazprom could not ring up its new deal for another day, but terms emerged from the sale of $1 billion by the Emirate of Abu Dhabi as emerging markets dug itself into a deeper hole.

In addition, $18.9 million left emerging markets mutual funds this week due as measured by net redemptions from hard currency funds. The loss makes it the second straight week to post net outflows, according to EPFR Global.

In trading, investors were anxious to reduce risk as much as possible, a source said.

"People are pretty nervous ... This is ridiculous," a syndicate official who specializes in Latin America said.

"Fundamentally nothing has changed," the official said about Latin American markets, adding that the horrid conditions are spilling over from other markets.

"You can't fight a trend," the official said.

Market watchers are still wondering how bad things will get.

"I think it can come a little bit lower, but in the end it will go up," said a syndicate desk official.

The official speculated that intervention or at least reassurance from governments may be necessary to precipitate a rebound, "then everybody will buy again," the official said, adding "or prices will go so low and people will start bottom fishing."

This past week saw many deals fall by the wayside and the trend looks to continue into the coming week, according to another syndicate desk official.

Across the debt markets, 35 companies reworked or abandoned deals over the past three weeks due to investor demand for higher interest premiums, according to a market source.

Abu Dhabi prices $1 billion

Terms emerged from Abu Dhabi's completed sale of $1 billion five-year 5½% notes (Aa2/AA/AA) at 99.918 to yield five-year Treasuries plus 84 basis points.

The price came with a spread of mid-swaps plus 18 bps, towards the tighter end of the initial guidance set at mid-swaps plus 18 to 20 bps.

Citigroup and Deutsche Bank brought the deal which is Abu Dhabi's debut issuance.

Philippines drops

Earlier in Asian trading, market players took their cue from Thursday's EM debt debacle, and prices of widely held issues like Philippine sovereigns sank and its credit default swaps contracts gapped upward to yawning levels, completely reversing the slightly positive, more steadying trend seen in those during the local trading day Thursday.

U.S. Treasury issues continued to gain on Friday, although at a somewhat more moderate pace than the surge seen on Thursday. The yield on the benchmark 10-year issue came in by another 4 bps to 4.76%. For the week, that represented a 19 bps contraction, the most seen since last September, with the flight into Treasuries seen as a sign of market unease with riskier asset classes, such as EM bonds and stock, U.S. equities, and high yield bonds, all of which had a rough week.

The key gauge of investor risk tolerance - spreads between emerging debt and the yields on Treasuries issues - was seen unchanged on the day, with the EMBI+ index compiled by JP Morgan & Co. showing the average EM spread over Treasuries holding steady at 226 basis points.

Still, that represented an improvement over the rout seen on Thursday, when spreads of individual EM countries had ballooned to their highest levels seen in many months, as investors sought the relative safety of Treasuries, and the EMBI+ spread representing the market as a whole had zoomed nearly 30 bps on the day, the biggest one-day jump since May 2004.

For the week, the widely followed performance gauge expanded some 46 bps, with the gap between Washington's paper and that of emerging countries seen at its widest level in nearly 13 months.

However, some in the market thought that after Thursday's widespread capitulation, emerging debt has nowhere else to go but back upward - at least at some point in the foreseeable future.

In a research note, RBC Capital Markets told investors that "while EM [credits] are likely to see further short-term pain if the re-pricing of global credit/ risk markets deepens, we believe that this may only prove transitory, as eventually investors will again see long-term value in EM, given strong [economic] fundamentals."

Trader sees improvement

On Friday, with a perception that the sell off may have been overdone and aided by the news that the U.S. economy grew by a more-than-expected 3.6% last quarter on rising exports, commercial construction and government spending - a statistic which helped slow down the Treasuries juggernaut - EM bonds had their best session in a couple of days.

"We're closing on the tights for the day," said a New York-based trader in Latin American debt on Friday afternoon, "pretty much unchanged from last night. We widened out a bit today, but we came all the way back."

He added that "when stocks were at their worst, we were pretty wide today, but we kind of bounced back."

Among the standouts he saw was Venezuela's benchmark dollar-denominated 9¼% notes due 2027, which firmed to 104 bid, 104.5 offered.

He also noted that Brazil's benchmark 11% global bonds due 2040 - considered the most liquid and most widely traded EM issue, almost a proxy for EM debt in general - was holding at 129 bid, 129.5 offered, which he called "up a little on the day."

Another winner, he said, was Mexico, whose bonds "traded well, maybe a couple of basis points tighter, nothing too exciting. There was a decent amount of spread widening Thursday, so it couldn't really go too much further today. So it kind of stabilized."

Brazil seen easier later on

But at another desk, the Brazilian '40s were seen having given up their earlier gains - which had totaled as much as 1½ points on the day - to finish slightly easier, down about 1/3 point to finish at their low for the year of 127.5. That came on top of the 3 point drop in the bonds recorded on Thursday.

Brazil's dollar-denominated 7 7/8% global bonds due 2015 were quoted at just above 108 on Friday, down about ¾ point, while the bonds' yield widened out by 7 bps to 6.43%.

The cost of insuring Brazilian debt against a default by means of CDS contracts meantime continued to push upward and was seen by a source to have widened to 150 bps on Friday from about 146 bps on Thursday - although another source quoted a price as high as 152.5 bps, up from 142.5 bps on Thursday, when that figure had jumped nearly 50 bps in one session. A month ago, similar protection for Brazilian bonds could be had for a mere 74 bps - less than half of Friday's closing level.

Venezuela, Ecuador up on oil news

Venezuela's bonds - which have been among the hardest-hit during the recent EM slide due to investor jitters about the impact the policies of the country's bombastic and unpredictable president, Hugo Chavez, may have on their holdings, were seen turning back upward Friday, helped by a surge in the world price of crude oil, Venezuela's key export commodity and the lynchpin of its economy.

Spurred by expectations of rising U.S. oil demand, the price of a barrel of light sweet crude surged to $77.02 in afternoon trading on the New York Mercantile Exchange - just a penny below the record closing level set about a year ago. In response Venezuela's bonds were seen up an average of 0.27% on the day on the EMBI+.

And Ecuador's battered notes - another big loser so far this year on investor fears about the willingness of president Rafael Correa's government to continue meeting its debt obligations - were up even more, soaring an estimated 2.87% on the day, according to the EMBI+.

Besides the rising price of oil, which benefits Ecuador, an oil exporter like Venezuela, investors were also said to be hopeful that their fears about the Correa regime's intentions would be assuaged by the Quito cabinet shuffle earlier in the week which saw hard-line economy minister Ricardo Patino replaced by Fausto Ortiz, considered more of a technocrat than an ideologue like Patino and more likely to continue paying the debt than his predecessor was.

Argentina debt ends mixed

After having led the EM market downward for three consecutive sessions - part of its own 10-session losing streak - Argentina's volatile bonds, which absolutely got walloped on Thursday, were seen actually ending mixed on Friday, with some issues seen up as much as 2.2%, while others fell by 2.4%.

Among the latter group was the country's benchmark 8.28% dollar-denominated bonds due 2033, which were seen down about 2.5 points on the session at 81, although that was a moderation from Thursday's 6 point slide in the bonds' price. Its yield widened out another 30 bps to 10.20%, after having risen more than twice as much on Thursday.

However, a source said that the 5-year CDS contract on Argentine debt came down about 5 bps from Thursday's all-time high level at 430 bps to around 425 bps.

Mexico bonds gain

Mexican bonds were seen better on the session, helped by the oil price rise, as well as by the decision by the country's central bank to hold its key lending rate steady at 7¼% - even though the country's inflation rate edged upward to 3.98% in June from 3.95% the prior month.

The central bank, the Banco de Mexico, has targeted a 4% inflation rate.

Also helping was the U.S. economic growth report, since the biggest trading partner for Mexico's burgeoning export industries is its northern neighbor.

After four days of declines, its 7¼% peso denominated bonds due 2016 was seen up ¼ point to just over the 96.5 level, while the bonds' yield came in by 4 bps to 7.77%.

Philippine bonds trade off

Outside of Latin America, Philippine government bonds, considered the most widely held Asian paper, resumed their recent downward move during the local trading day there Friday, with a vengeance.

After having held steady in Thursday's dealings, Manila's 2031 bonds dropped to 106.25 bid, 107.25 offered, well down from the previous day's 108.625 close, while its 2032 bonds were quoted having plummeted to 92.50 bid, 93 offered from 94.875, as Asian investors took their cue from the accelerated fall in the equity and non-Treasury debt markets seen during the Thursday trading session in New York.

The cost of the 5-year CDS contract on that debt - after having stayed in a range around 145-150 bps during the local trading session on Thursday - jumped out to a yawning 195-210 bps on Friday, reflecting investors heightened concerns about owning risky paper.

Turkish CDS prices improve

Investors in Turkish debt were seen having a little more of a risk appetite on Friday, as the cost of a 5-year CDS contract on Ankara's government paper was seen to have moderated to 212 bps.

The cost of insuring $10 million or Turkish bonds against a default had ballooned out to around 230 on Thursday - a sharp deterioration from levels around 140 bps seen right after last weekend's successful national legislative elections.

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