Emerging market up on bullish U.S. equities market; Brazil 2040s up

By Reshmi Basu and Paul A. Harris

New York, Oct. 28 - Emerging market debt traded with a firmer tone Friday, led by the Brazil bond due 2040.

The gains came despite a volatile session endured by the U.S. Treasury market. But instead of looking at U.S. governments, emerging markets took its cue from the bullish U.S. equities market.

During the week, the 10-year note saw its biggest weekly rise in yield since March.

Early in the session, the Treasury market regained composure, brought on by stronger growth for the third quarter and a tame reading on current inflation data in the United States. GDP increased 3.8% in the quarter, higher than the 3.6% expected. But the core PCE price index increased 1.9% over the past year, down from a 2% increase in the second quarter.

But by mid-afternoon, the Treasury gains were erased on the return of bearish sentiment.

"It started well, but towards the end of the day, it reached towards 4.60% again," observed a buyside source.

By the end of trading, the yield on the 10-year note stood at 4.57% compared to 4.55% at the close of Thursday's session. However, the stock market held onto to its gains, fueled by the data showing growth in GDP.

The Dow Jones Industrial Average surged 172.82 points to 10,402.77.

Early in Friday's session, emerging market debt had firmed relative to Thursday's closing levels, according to a syndicate source.

The source marked the Brazil bond due 2040 at 119½ bid, up a point from Thursday's 118½ bid.

"We are going to end the day tighter than yesterday [Thursday]. Brazil '40s are still strong at 1191/2. It's a stronger feel today [Friday]," added the buyside source.

Nonetheless, it was difficult to gage just what exactly is market sentiment, given all the volatility.

"We're tighter than we were a week ago. But if Treasuries continue to be weak, I find it hard to believe that we are going to rally significantly," noted the buyside source.

However, it was good news within the asset class that helped prop the market higher. Mexico cut its benchmark interest rate to 9% from 9¼%, which is its third straight cut.

Additionally, the central bank cut this year's inflation forecast to 3½% from "close to" 4%.

During the session, the Mexico bond due 2009 added a quarter of a point to 115.80 bid.

The Ecuador bond due 2030 gained 0.45 to 88.35 bid. The Venezuela bond due 2027 moved up 1.20 to 116 bid.

Meanwhile, the syndicate official said, Kazkommerts Finance BV's new 9.2% perpetual note, which priced at par in a $100 million issue on Thursday via UBS, ING and JP Morgan, was trading in a 101 context early Friday.

Sell-off sparked by GM

An emerging markets investor said Friday that high beta emerging markets names sold off in the latter half of the week on the news that the U.S. Securities and Exchange Commission is examining General Motors Corp.'s pension fund accounting.

The situation was made worse, the source added, by recent weakness in Latin American currencies, as well as by the perception that cash flowing into emerging markets debt has slowed down. The investor cited data from EmergingPortfolio.com for the week ending Oct. 26 which showed that dedicated emerging markets debt funds showed outflows of $28.6 million, the weakest showing since the third week of June.

Nonetheless, emerging markets has weathered the uncertain global environment.

That resilience comes from the technical picture: expected low issuance and October's amortization and coupon payments, noted the buyside source.

"There's probably a lot of cash on the side and I think that the view is that that cash is ready to be invested if the opportunity rises.

"But mostly I think it's that people think there's not a lot of issuance and there's a likelihood that there's going to be more inflows out there.

"Outflows have been very contained, given the volatility," commented the buyside source.

Additionally tradition dictates that toward year-end, money is allocated to emerging markets as institutional funds begin their allocations for next year.

Along with that technical support, the market has also received good news such as the ratings upgrades for Bulgaria and Russian banks, observed the buyside source.

"On the fundamental side, the story is as good as it's ever been."

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