Little direction to quiet market; Brazil firmer, Argentina gains

By Paul Deckelman and Aaron Hochman-Zimmerman

New York, Aug. 27 - Emerging market bonds were seen largely drifting around in quiet trading Monday, with a holiday in London and another in the Philippines serving as an excuse for market players to stay out.

EM bonds and other relatively risky asset classes such as U.S. and global equities and junk bonds have been buffeted over the past few weeks by investor fears that the subprime lending industry meltdown earlier this year could have wider damaging impact on the American economy - the largest export market for many developing countries - and thus, a ripple effect on other economies as well. And fears about such an impact got a fresh boost on Monday as the leading U.S. real estate industry group, the National Association of Realtors, reported that sales of existing homes declined 0.2% in July to an annual rate of 5.75 million units, the lowest in five years. Inventories of unsold single-family homes rose to the equivalent of 9.2 months' supply, a 16-year high.

That helped to push U.S. equities lower across the board, particularly the S&P 500, which lost 12.58 points, or 0.9%, to end at 1,466.79. The drop was led, not surprisingly, by the homebuilders, with 15 of 16 in S&P indexes seen on the slide, including industry leader Lennar Corp.

With stocks down, Treasury yields moved higher - the yield on the benchmark 10-year notes fell by 4 basis points to 4.57%, while two-year note yields dropped 6 bps to 4.23%. That in turn helped widen spreads between the U.S. paper and yields on emerging debt, as measured by the JP Morgan & Co. EMBI+ index of emerging performance, seen 1 bp wider at 229 bps.

Latin market seen quiet

A trader in Latin American bonds characterized Monday's market as "extremely quiet - think of the South Pole in the middle of July."

He said that "nothing went on - things were basically unchanged from where we came in. They tightened a little during the day - things were a little better, with a slightly better tone to the credit markets."

However, he said, "with this S&P move at the end of the day, things are coming off again and we're probably unchanged."

He saw Brazil's benchmark 11% dollar-denominated bonds due 2040 having firmed to 132.20-132.30.

Argentina's dollar-denominated Discount bonds "were quite a bit tighter today" at 85.5-90. "All of Argentina was tighter," he added.

Venezuela's 9¼% bonds due 2027 finished at 99.85 bid, 100.75 offered. He saw "quiet, slightly better buying" in bonds issued by that country's state-run Petroleos de Venezuela SA.

He did not see Ecuador's 10% bonds due 2033, but observed that "there's never really much of a market in that stupid bond anywhere."

Elsewhere in the Latin market, a market source pegged Argentina's bonds up 1.3% on average, with the dollar-denominated Discounts estimated to have gained 2.3% on the day in over-the-counter trading.

Brazil's benchmark zero-coupon real-denominated bonds due next January moved up, as their yield fell 3 bps to 11.26%.

Mexico's benchmark peso-denominated 10-year bonds firmed by about 1/8 point, quoted at 101.62.

Philippines steady on holiday

Earlier in the Asian market, Philippine sovereigns were seen steady with their home market in Manila closed for a public holiday. The widely traded benchmark bonds due 2031 were quoted at 105.5 bid, 106.125 offered, while its 2032 bonds were at 94.5 bid, 95.5 offered.

Meanwhile, the cost of hedging against a possible discount in the bonds using credit default swaps contracts hung in at about 175/185 bps.

Political turmoil takes Pakistan toll

Pakistan's 10-year eurobonds were seen yielding about 462 bps over comparable Treasuries, a considerable spread widening from the 200 bps spread seen at issue back in May.

Analysts cited continued political unrest in the South Asian nation, where the rule of President Pervez Musharraf remains under challenge, particularly by supporters of former prime minister Nawaz Sharif, who was ousted from power by Musharraf in a bloodless 1999 coup, but who remans determined to return to the country.

Hints of life in primary

The sluggish primary market showed small signs of life as one local deal came into play and rumors of a retap swirled.

Even as the VIX index was once again on the rise, Mexico's Maxcom Telecomunicaciones, SA de CV is rumored to have plans of tapping its 11% notes due in 2014, according to an emerging markets analyst who specializes in Latin America.

Morgan Stanley would likely bring the new paper, the analyst said.

"[Maxtel is] just a rumor, it is very old but it is possible," said an emerging markets syndicate desk official who also specializes Latin America.

The official expressed doubts, but said: "It would be good to see a new issue in the market."

A spokesperson for Morgan Stanley declined to comment about the possibility an issuance.

Quiet was the general sentiment around the market Monday.

"I think people are tired," said a buyside source, adding: "With many on vacation I would expect to get more direction in September," the buysider said.

"It is extremely quiet today," said another syndicate official.

Safety in Asian investment grade

A market source said that those who have been hedging credit exposure with CDS indexes and liquid single-name CDS have been damaged by credit exposure.

The source recommends adding risk, but only in long-term investment-grade Asian credits. The better market environment which allows for the increased risk exist partly due to U.S. Federal Reserve Bank cut of the bank discount rate and partly due to Bank of America's $2 billion injection into Counrywide Financial, the market source said.

ZTE brings 4 billion yuan

China's ZTE Corp. is planning an offer of five-year bonds worth up to 4 billion yuan with warrants.

The exact amounts of the note and warrants are still to be determined by the company's board of directors.

All of the proceeds from the sale will be used for research, development and industrialization.

ZTE is a Shenzhen, China-based telecommunications firm.

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