Some hope in primary; Gazprom lingers; Edenor to return in fall; emerging bonds give up early gains

By Paul Deckelman and Aaron Hochman-Zimmerman

New York, July 31 - Rays of sunshine peeked through the black clouds gathered over the emerging markets primary, but some are still forecasting stormy skies for another month.

In the secondary market, an early advance in tandem with U.S. stocks faded as equities turned lower later in the day on renewed investor concerns about the continuing ripple effect from the subprime mortgage lending industry meltdown. As Wall Street turned south after troubled American Home Mortgage Investment Corp. said its bankers had turned off the money spigot, leaving it unable to fund new loans that it has committed to, the early optimism that the emerging markets - badly battered last week - might manage two winning sessions in a row quickly faded.

Still, optimists remain.

"I think EM spreads should grind tighter for a little while longer," an emerging markets analyst said.

"We've got some pretty attractive valuations out there now, on some names without a lot of fundamental or now even technical reasons to steer clear," the analyst said.

The analyst does recognize that the sun may not shine on emerging markets for a little while, but still holds a fair amount of optimism.

"The steady drip of bad news from the subprime story is going to weigh on the market and keep spreads from going back to the lows, but that doesn't mean we can't have a nice week or two from here," the analyst added.

Others have good feelings about Latin America's near future.

"[The] outlook for Latin America remains constructive, though we think inflation pressures in the U.S. rather than poor growth could come back as the dominant factor in the economic outlook," a market source said.

Even fears of inflation in Latin American countries may be allayed as this year fades into next.

"Tight money, solid external account performance, and good growth are solid fundamentals underpinning the general exchange rate appreciation in the region in recent years," a market source said.

Although, "we are reaching an end to that phase and currencies will be more stable in 2008," the source added.

An emerging markets syndicate official focused on Latin America was not willing to call for sunny days in emerging markets until the fall breezes clear out the clouds.

"My view is that the market is closed until September; but I hope I am wrong," the official said.

And then there was one

Even if doors are closing on every other new deal, there may still be room for Russia's OAO Gazprom to squeak past with its benchmark 30-year deal this week.

"This is a pretty attractive, liquid deal that should be able to get through," an emerging markets analyst said.

On the other hand, "if the broader market continues to recover the way it has for the last two days now, I would say that a pulled Gazprom deal would be a very negative sign that there is a lot more EM indigestion out there than many had thought," the analyst said.

"That's especially true if Gazprom is still willing to pay [over 220 basis points] or more the way the deal's been discussed," the analyst said.

"I do think they get it done [and] probably will prefer to wait another day or so just to make sure the dust is all settled and not push the market too far," the analyst added.

See you in the fall

Argentina's Empresa Distribuidora y Comercializadora Norte SA (Edenor) has extended the subscription period for its $250 million 10-year bonds (B2/B) until Nov. 2 from July 31.

The 10-year notes which were lowered to $220 million and raised again to $250 million have been talked at 9¼% to 9 3/8%.

Citigroup and Deutsche Bank are mandated as bookrunners for the offer.

The Buenos Aires, Argentina-based energy distribution company will use the proceeds from the sale to refinance existing debt.

Early gains fall by the wayside

In trading Tuesday, the latest reminder of continuing credit problems drove investors back to the safety of U.S. Treasury issues at the expense of riskier asset classes such as equities, high yield bonds and emerging debt.

The benchmark 10-year Treasury notes rose in price as their yield fell to the lowest levels seen since mid-May, down 6 basis points on the day to 4.75%.

With Treasury yields lower and risk-averse investors getting out of EM bonds, spreads between Treasuries and emerging debt - the key measure of the level of investor tolerance of risk, or aversion to it - widened out, with the widely followed EMBI+ index compiled by JP Morgan & Co. giving up its early spread-tightening gains. The average EM spread, which had narrowed on Monday to 219 bps, had initially come in as far as 215 bps - but by day's end had widened back out to 223 bps, 4 bps wider on the day.

Latin American issues took the brunt of the late-day downturn, from small spread widenings in such relatively well regarded names as Colombia, Peru and Brazil, and considerably bigger widenings in high-beta fixtures Argentina and Venezuela. The cost of credit default swaps went up pretty much across the board.

Outside of Latin America, an unexpected anti-inflation measure decreed by India's central bank pushed that country's bonds down and their yields up.

Earlier, Asian bonds, such as Philippine sovereigns, had been firmer during the local trading day, taking their cues from the strength which the sector saw in Monday's New York trading.

Latin American EM issues had "a horrible close," an analyst declared in a research note, citing the stock turndown "and rumors of more hedge funds going under." He said that while the Latin EM debt market actually "is in better shape than most credit markets given strong technicals and strong fundamentals," including recent talk of Brazil buying back bonds and continued strong capital inflows, still, "it will be very difficult for our market to sustain rallies while the world is fearing more hedge fund failures and continued weakness in the broader credit markets."

Argentina leads losers

Argentine bonds - last week's big losers, and the big winners in Monday's market rebound - were leading the way back downward on Tuesday.

A source said that its benchmark dollar-denominated 8.28% bonds due 2033 lost more than 1¼ points on the day, ending quoted at 83.20.

The yield on the bonds, after having initially fallen as much as 8 bps, turned around and ended the day having given all of that spread-tightening back and then ballooning out an additional 15 bps, to 9.95%.

The spread between Argentina's bonds and comparable U.S. paper likewise initially narrowed, by as much as 15 bps, but ended the session 5 bps wider.

However, the country's locally denominated bonds were seen posting gains, even as the dollar notes were going down. That peso-denominated paper was estimated to have gained an average 1.7% on the session, on top of the 2% gain seen Monday. Among the big gainers Tuesday were the Boden 2014 bonds, up nearly 3% on the day.

However, Argentina was otherwise treacherous for debt investors Tuesday. Five-year CDS widened 18 bps to stand at 410/420 bps, although another source, while seeing the same 410 bps price, called that only a 5 bps widening.

Among other Latin American names, Brazil's benchmark dollar-denominated 11% global bonds due 2040 gave up its early gains of more than half a point to end 1/8 point easier on the day, quoted at 128.688.

CDS contracts on Brazil rose 5 bps to 129.5 bps. Another source saw that price go as high as 133 bps, up more than 10 bps on the session.

Venezuela's bonds initially rose, with the average spread seen narrowing 3 bps to 359 bps, but by day's end, those bonds had given up their gains, with spreads seen having widened by 10 to 12 bps.

The cost of a CDS contract on Venezuela's debt was seen having increased 18 bps on the day to 380/390 bps.

Even Colombia and Peru, which routinely outperform other Latin credits, sere seen having widened against Treasuries, Colombia by 2 bps to 4 bps, Peru by 7 bps to 9 bps.

However, while the cost of a CDS contract on Peruvian debt widened 5 bps on the day to 127-133 bps, Colombia's contract actually tightened, by 8 bps to 160-170 bps.

Philippine CDS tighten

Earlier in the day, before Wall Street's late slide, Asian bonds were seen better - although they could well fall in Tuesday/Wednesday's overnight Asian action.

The cost of a five-year Philippine CDS contract came down as low as 195 bps during the session, before widening from that tight level to end around 212/218 bps - somewhat wider than Monday's New York close, but well down from levels around 245 bps seen on Monday in Asia.

Other Asian CDS spreads narrowed from day-earlier levels on Tuesday, with State Bank of India seen at 95/110 bps, in 5 bps on the day.

India's government bonds meantime headed lower after the country's central bank, the Reserve Bank of India, surprised the local banking industry by raising the amount of funds they must retain in order to cover deposits. It was the third time this year that the central bank has ordered the country's banks to curb lending and investment as a means of combating inflation.

India's rupee-denominated 7.49% bonds due 2017 fell more than a point on the day to 97.61, while the bonds' yield was quoted having increased 7 or 8 bps to 7.84%.

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