Debt exchange news sparks rally across Argentina curve; EMBI-plus gains 15 bps

By Paul A. Harris

St. Louis, Aug. 24 - Emerging markets debt was stronger as the final week of August got underway, market sources said.

The EMBI-Plus index was at 365 bps bid, 17 bps tighter, heading into the close in continental Europe, according to a trader in Switzerland.

"There has not been much activity," said the trader who added that there nevertheless remains a pretty good bid for Brazil and Colombia.

Shortly after the U.S. close, an asset manager in Boston, who tracks emerging markets, spotted the EMBI-Plus index at 367 bps bid, and remarked that it had widened by 3 bps since the London close.

Elsewhere the debt securities of Argentina rallied as a debt exchange targeting local currency inflation-linked bonds got underway.

Argentine up across the curve

The entire Argentine curve rallied on news that the government has undertaken a debt exchange involving ARS 9 billion (approximately $2.3 billion) of inflation-linked bonds, according to a trader in Switzerland.

Argentina's dollar-denominated 8.28% discount bonds due 2033 were at 65 bid, 66½ offered, up approximately 6 points from 60 bid last week, the trader added.

"People are still buying up Argentina, which has been dead for the past three or four weeks," the source remarked.

"The interest is especially focused on Argentina sovereigns because they want to switch out to longer-dated maturities."

The exchange includes inflation-linked bonds due in 2010, 2011 and 2012, according to information reported Friday by Télam, the national news agency of Argentina.

Participating investors would be swapped into Bocans due 2014, according to the Telam story.

Breathing room for Argentina

Although the exchange only targets the inflation-linked local bonds, the news created a tail-wind for all of Argentina's local bonds as well as its dollar-denominated bonds, according to an emerging markets investor based in Los Angeles.

"Argentina has a lot of debt amortizations and coupon payments over the next three years," the investor explained.

"If they are successful in this debt exchange they're not going to have these payments, so investors will get more comfortable with Argentina's debt profile over the next three years because the possibility of a default during that period becomes more remote."

A rate-hike for Israel

Elsewhere on Monday news that the Israeli central bank hiked interest rates triggered a proportional sell-off on the short end of the Israeli curve, according to an emerging markets investor.

The Bank of Israel raised its benchmark interest rate by 25 bps to ¾% at its meeting on Monday, according to a news release issued by the bank.

The bank noted that CPI rose by 1.1% in July, exceeding expectations of an increase from 0.8% to 0.9%.

The bank also examined data which showed that the decline in economic activity has halted, with increases in the second quarter of GDP, exports and private consumption.

The bank opted to raise the interest rate to ¾% in order to return inflation to within the target range while supporting financial stability.

"Israel is the first emerging markets country to raise rates," the investor said.

"It is an expression of confidence that Israel is coming out of the recession, strongly. However the market was not pricing in the hike; it had priced in no change to the rates.

"So there has been a sell-off of about 25 bps on the short end of the curve, which is the amount that rates were increased."

Vietnam prices $100 million

The Monday primary market was a quiet one, sources said.

Vietnam sold $100 million in government bonds due Aug. 26, 2010 at par to yield 2.98% at its auction on Monday.

Bids ranged from a lowest registered yield of 2% to a highest registered yield of 4.5% with the ceiling yield and winning yield matching at 2.98%.

For the offering of $100 million, bids were received for $370 million and accepted for $100 million.

Vietnam is set to auction $100 million of two-year paper on Wednesday and $50 million of three-year paper on Friday, according to a report from Vietnamnews.

Despite the fact that the bonds are dollar-denominated the auctions appear targeted to local investors, according to a U.S.-based asset manager.

Apart from that, the market remained quiet, sources said.

The global bond market is expected to remain quiet until after the three-day Labor Day holiday weekend in the United States, the traditional summer-fall boundary.

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