Tall losses on short EM session; Argentina, Venezuela crumble; local deals price in primary

By Aaron Hochman-Zimmerman

New York, Nov. 21 - For emerging markets investors in the United States, the long weekend came not a moment too soon.

Elsewhere, traders had to watch and hope the implosion did not continue until Friday afternoon.

"It's so grim," a trader said.

"And it's only Wednesday!" he said, thankful for the Thanksgiving reprieve.

The growing cracks in the emerging markets façade prompted by troubles emanating from the banking sector and the lack of liquidity left the usual suspects to fall the farthest.

"In EM, Argentina and Venezuela are backing off," said Enrique Alvarez, a Latin America debt strategist at think tank IDEAglobal.

Venezuela was roughed up for a loss of almost 2.25 from its 9.25% sovereigns and Argentina went tumbling to the tune of a 2 point loss from its discount bonds due 2033.

Even some of the "larger and sturdier credits" are beginning to show some "actual losses," Alvarez said.

Brazil and Colombia were included in the crowd of issuers which were losing value on the price side.

"There's a shake out going on," he said.

The primary market looked a little brighter than trading as it priced two local-currency deals.

Singapore's Oversea-Chinese Banking Corp. Ltd. priced S$225 million of 10-year lower tier II notes and the Philippines' Banco de Oro - EPCI, Inc. priced PHP 10 billion of 10-year notes.

Still, both major new issue activity and the secondary market face an uphill battle to produce a strong recovery.

"We've got to get through the financial banks' year end for one, and then we've got to see what equities do here," the trader said.

If equities can find a level, then emerging market bonds will have a much better chance to stabilize, he said.

As equities fell in Wednesday's session, volatility was climbing, but its rise was tempered into the afternoon. The VIX index was seen up 0.69 at 25.57. The VIX is the standard yardstick of market volatility.

Emerging markets widened significantly during Wednesday's abbreviated session. JP Morgan's EMBI+ index tacked on another 13 basis points to a spread of 260 bps.

LatAm taking 'actual losses'

The flight to quality in Latin American trading is showing its effects on the prices of many of the benchmark bonds in the sector.

"There's lots of risk aversion going on," IDEAglobal's Alvarez said.

"There's a panicky feeling coming across the field, coming into EM," he said.

The source of the panic has been U.S. equities, bank balance sheets, structured investment vehicles, and liquidity stress, he said.

"All of that is in the back of people's minds and it's guiding sentiment," he said.

Venezuela's 9.25% government sovereigns fell off the cliff for a loss of approximately 2.25. The issue due in 2027 was traded at 97.75 bid, 99 offered.

Argentina's 8.28% discount bonds due 2033 were also bloodied for a loss of 2 points and were quoted at 91.5 bid, 92 offered.

Brazil's traditional stability could not hold under the pressure of Wednesday's market conditions.

The government bonds due 2037 dropped 1.5 to a bid of 111.65 and the 11% notes due 2040 fell approximately 1 point to 132 bid, 132.75 offered.

Ecuador, which was upgraded to B- from CCC by Standard & Poor's on Tuesday, saw its 10% sovereign bonds due 2030 weaken by 1 point to 95.25 bid, 95.7 offered. The nation's debt added 2.5 on Tuesday in response to the ratings move.

"I think it was completely mistimed," Alvarez said about the chances of the new rating helping trading levels no the bond.

Harsh market halts Emerging Europe

"Everyone is pretty scared," a syndicate official said.

Even in the absence of significant bad news, conditions in emerging Europe continue to worsen, he said.

It is neither a buying nor a selling market, he said; the difficult environment has driven investors away from the table.

"Every bid is turned down by the market makers," he said, and "it makes no difference whether it's high yield or high grade."

Investors are shifting towards a long-term approach, he said.

"Two to three to four years, they buy and hold," he said

In Russia, the sovereign due 2030 was seen 0.35 lower at 112.25 bid, 112.4 offered.

Turkey's benchmark sovereigns due 2030 dropped 0.625 to trade at approximately 156 bid, 156.5 offered.

Asia 'incredibly difficult'

Asian paper widened during Wednesday's session in the United States, but "it's been worse in Asia than it has been here," a trader said.

"It's kind of setting our tone," he said, and "it's been so incredibly difficult."

In the Philippines, the senate will hear testimony from businessman Reghis Romero, who along with members of the Housing and Land Use Regulatory Board, have been accused of bribing government officials including governors and congressman, according to a report in the Manila Times.

The Philippines' sovereign due 2030 were spotted at 130 bid, 131 offered.

Indonesia's government bonds due 2017 fell 1 point to 102 bid, 103 offered.

In Pakistan, former cricket star and current political activist, Imran Khan was released from prison. He had been arrested before he could speak during a rally at Lahore's Punjab University on Nov. 14.

Khan, along with many other opposition figures, are demanding the end to the state of emergency declared on Nov. 3 along with the release of the political prisoners still in custody.

The Pakistani sovereigns due 2017 were quoted down 0.5 at a bid of 85.

The issue has traded based on the influences of the larger market and has to some degree avoided swings based on its Pakistan's political strife, but "it will go back to being news related," the trader said.

Primary prices local deals

Despite the utter quiet in the primary on Tuesday and the plummeting prices on Wednesday, two deals priced Wednesday.

Oversea-Chinese Banking priced S$225 million 10-year lower tier II notes (Aa2/A/A+) at a coupon of 3.78%.

If the notes are not called on the step-up date of Nov. 28, 2012 the interest rate becomes a floating rate equal to the Singapore-dollar swap offer rate plus 172 bps.

OCBC is a Singapore-based retail and commercial lender.

Banco de Oro priced PHP 10 billion 10-year lower tier II notes with a coupon of 7%.

The notes feature five years of call protection.

Banco de Oro is a Manila, Philippines-based commercial and retail bank.

Even when U.S. investors return from their holiday, the primary market will not likely reopen by printing many new issues, a syndicate official said.

"The primary is full, it's not possible to place anything," he said.

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