By Daniel Bases

NEW YORK, Dec 19 (Reuters) - Investors dipped deeper into
their cash horde on Friday, buying selectively in emerging
market sovereign bonds but stopped short when it came to stocks
and currencies in thin pre-Christmas holiday trade.

Yield spreads between sovereign bonds and benchmark U.S.
Treasuries shrank by 13 basis points to 699 basis points, the
narrowest point in 3-1/2 weeks, according to the JP Morgan
Emerging Markets Bond Index Plus 11EMJ.JPMEMBIPLUS.

The improvement in spreads occurred at the same time mutual
funds experienced slackening in the amount of net cash
outflows. Concurrently, investors pulled more money out of
safe-haven money market funds than they put in for the first
time in 13 weeks, according to Boston-based fund tracker EPFR
Global. (For more click in [ID:nN19502829])

Money market mutual funds have taken in a net $391.8
billion year-to-date, according to EPFR as risk aversion pushed
cash to the sidelines amid the financial crisis.

"We are not seeing the scale of outflows and in fact we're
seeing lower and lower outflows, which maybe gives fund
managers some type of ease that the coupon interest and
amortizations that they have received start to be put to work,"
said David Spegel, global head of emerging market strategy at
ING in New York.

"It is also year-end and people are looking to reallocate,"
Spegel said.

The light trading volumes and listless trade in developed
markets did not give much support to emerging market stocks,
even after President George W. Bush announced $17.4 billion in
emergency loans to faltering U.S. automakers.

Emerging market stocks, which have only had three months of
gains this year -- February, April and May -- are rallying
through the end of December, but looking ahead into the new
year, the view is not encouraging.

MSCI's emerging markets stock index fell 7.83 points or
1.33 percent to end the week at 582.47, but up 5.57 percent for
the week .MSCIEF. MSCI's Latin America index dropped 18.28
points or 0.85 percent to 2,144.39. For the week the index is
up 1.76 percent .MILA00000PUS.

"Having had a kind of seasonal effect at the end of
December, we think we'll probably sell off again in the new
year on the back of what is going to be presumably truly awful
corporate earnings reports for the fourth quarter," said
Geoffrey Dennis, Latin America equity strategist at Citigroup
in New York. "Then we get the real rally in the middle of the
year."

Falling commodity prices -- crude oil dropped 6.49 percent
to settle at $33.87 a barrel CLF9-- undermined stocks in Sao
Paulo.

In the currency markets the U.S. dollar gained ground
broadly, but had mixed results in Latin America.

Colombia's central bank cut interest rates by half of a
percentage point to 9.50 percent on Friday. The cut comes as
the economy has slowed due to the world credit crisis, which
has reduced demand for oil and other commodities produced in
Latin America.

"We expect many others such as Brazil, Chile, Mexico and
likely Peru to follow with rate cuts during the first quarter
of 2009," said Alberto Ramos, who follows Colombia for Goldman
Sachs in New York.

The Colombian peso fell 0.44 percent to 2,176.30 COP=RR
against the U.S. dollar.

The Brazilian real fell 0.13 percent to 2.36 per U.S.
dollar (BRBY: Quote, Profile, Research) while the Mexican peso climbed 0.27 percent to
13.1345 against the greenback MEXO1.

Brazil's central bank reduced commercial banks' obligatory
reserve requirements further on Friday -- to 60 percent from 70
percent -- in its latest attempt to ease a liquidity crunch in
domestic credit markets.

Mexico's economy will likely shrink by 0.1 percent next
year, burdened by a deep U.S. recession, according to analysts
in a central bank poll released on Friday.
(Additional reporting by Javier Mozzo and Hugh Bronstein in
Bogota, Renato Andrade in Brasilia and Noel Randewich in Mexico
City; Editing by Leslie Adler)