Nov. 4 (Bloomberg) -- Emerging-market bonds gained, extending their biggest rally since 2001 to a seventh day, as lower money-market rates eased investor concern that a credit squeeze will cut choke off lending to developing nations.

The extra yield investors demand to own emerging-market bonds instead of U.S. Treasuries narrowed 30 basis points, or 0.3 percentage point, to 5.83 percentage points at 5:06 p.m. in New York, according to JPMorgan Chase & Co.'s EMBI+ Index. The so- called spread has shrunk 2.83 percentage points since reaching a six-year high on Oct. 24.

Emerging-market assets are rebounding from a tumble in October as interest-rate cuts by central banks and as much as $3 trillion of emergency credit help drive down the London interbank offered rate, or Libor, that banks charge each other for loans. One-month Libor rates on dollar loans fell to 2.18 percent today, the lowest level since November 2004.

``The hope is that this will in part prevent an escalation of concerns about external funding for emerging markets,'' said Ralph Sueppel, chief economist at BlueCrest Capital Management Ltd. in London, which manages $2 billion in emerging-market assets. ``These concerns dominate over fears of economic slowdown.''

Investors began returning to emerging markets last week after the International Monetary Fund doubled borrowing limits for developing nations and the Federal Reserve provided $120 billion in currency swap agreements to Mexico, Brazil, South Korea and Singapore. Ukraine and Hungary were granted a total of more than $40 billion of loans from the IMF, European Union and World Bank to stabilize their economies.

`Found a Bottom'

Yield premiums on emerging-market had swelled 5.67 percentage points to 8.66 percentage points from the beginning of September to Oct. 24 as the worst financial crisis since the Great Depression deepened a global economic slump and curbed demand for developing nations' commodity exports. The UBS Bloomberg Constant Maturity Commodity Index has tumbled 39 percent from a record high reached on July 2.

Emerging-market bonds lost 20 percent in October, according to Merrill Lynch & Co. indexes. The securities are headed for their first annual loss in a decade and the worst year since Merrill began tracking the debt in 1992.

Ecuador led gains today, with the spread on the country's bonds contracting 3.51 percentage points to 27.29 percentage points, according to JPMorgan.

``It's seems we've found a bottom,'' said Cathy Elmore, who manages $700 million of emerging-market debt at WestLB Mellon Asset in London. ``The provision of swap lines has been very important.''

Peso, Real, Forint

The cost of protecting emerging-market bonds against default fell. Five-year credit-default swaps based on Turkey's debt dropped 58 basis points to 3.47 percentage points, according to Bloomberg data. That means it costs $347,000 to protect $10 million of the country's debt from default.

Argentina's five-year credit default swap declined 1.84 percentage points to 38.31 percentage points, the lowest since Oct. 23.

Credit-default swaps protect bondholders against default by paying the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.

The MSCI Emerging Markets Index of stocks rose for a sixth day, climbing 3.2 percent. The index has jumped 33 percent from a four-year low reached Oct. 27. Brazil's Bovespa rose 5.2 percent while Mexico's Bolsa gained 4.5 percent.

Emerging-market currencies also posted gains, with the Chilean peso surging 2.7 percent and the Brazilian real climbing 3.2 percent. In Eastern Europe, the forint gained 3.7 percent against the dollar while the Turkish lira rose 4.2 percent.

``This rally may have legs yet, although a pause before long is inevitable,'' Deutsche Bank AG analysts led by Marc Balston in London wrote in a research note today. ``Such an unbroken rally is rare in the history of emerging markets.''

To contact the reporter on this story: Lester Pimentel in New York at lpimentel1@bloomberg.net; Laura Cochrane in London at lcochrane3@bloomberg.net

Last Updated: November 4, 2008 17:11 EST