Emerging market debt continues slide; South Korea foils dollar, U.S. Treasuries

By Reshmi Basu and Paul A. Harris

New York, Feb. 22 - Emerging market debt continued its slide from Friday in the wake of a weaker dollar and a slump in U.S. Treasuries.

The South Korean Central Bank said it planned to sell some of its U.S. currency reserves for higher returns.

"South Korea trails China and Japan in terms of the amount of U.S. paper that they own. So it's more emblematic than anything," said a buyside source. "The fear is, 'What if China and Japan do the same thing, and start going into euros?'

"That's what people are doing - they're diversifying into euros."

The announcement triggered a sell-off in the dollar, which had its biggest fall in four months, down 1½% against the euro and 1.3% against the yen.

The weaker dollar put pressure on the already nervous U.S. Treasury market.

"The South Korean government has been talking about diversifying out of Treasuries, and that has implications for the Treasury market," said a capital markets source.

"The 10-year can easily go up to 4.50% any day, or any minute. So 5.00% is not really a wild guess, because the Asian countries have been buying up more than one-third of the bonds at the Treasury auctions.

"People are watching the market closely, and they want to know where the thing is headed - whether this is a quick correction or a new trend.

"The 30-year Treasury is up to 4.685%. After a long holiday that is notable," noted the source.

The yield on the 10-year note stood at 4.29% from 4¼% at Friday's close.

U.S. Treasuries were already on heightened alert after the unexpected surge in Friday's core producer prices.

"How high will the 10-year be at the end of 2005?" asked the source.

"I don't think the 10-year goes above 5.00% because there is really nowhere else to put your money.

"From the standpoint of an overseas investor, there are not many places to invest that much capital. You can go to the euro market and utilize a fair amount of capacity there for a while. But you are still getting a ton of dollars into the economy.

"Certainly Korea has an easier time diversifying away from Treasuries than does Japan or China because the amount of U.S. dollar purchases that are done between the U.S. and China, or between the U.S. and Japan, is far higher on a percentage basis than it is with South Korea," noted the buyside source.

Treasuries now await Wednesday's release of the consumer price index in the United States.

Soft real pulls down Brazilian paper

The dollar was not the only weak currency in Tuesday's trading. The real started at R$2.572, which was pushed all the way back to R$2.60 late in the day.

"That is going counter the U.S. dollar, which has been weakening throughout the day. That counteraction is putting pressure on our market," said Enrique Alvarez, Latin America debt strategist for think tank IDEAglobal.

The softer Brazilian currency pulled down the country's debt. The Brazil C bond fell 0.445 to 102.18 bid while the bond due 2040 lost 1.8 to 115 bid.

Other parts of the debt market also had a tough outing, as Ecuador, Russia and Venezuela were all down. The Ecuador bond due 2030 was down 1¾ to 91½ bid. The Russia bond due 2030 slipped ¾ of a point to 104¾ bid. The Venezuela bond due 2027 fell half a point to 102½ bid.

Alvarez added that investors are taking on defensive positions in case Wednesday's CPI numbers come in higher than expected.

Investors are also on the lookout for Thursday's release of the minutes from the Brazilian Central Bank's monetary policy committee (Copom) for clues as to whether the tightening cycle is coming to an end.

At its February meeting, the Copom raised the Selic rate to 18¾%, up half a point.

A market source told Prospect News that there has been a local outcry over the bank's policy. In an interview in a local paper O Estado de Sao Paolo, Brazilian agriculture minister Roberto Rodrigues called for a cut in interest rates, arguing that the current Selic rate is hurting exports.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.