Emerging market debt awaits Friday's job data; Brazil down with market despite good economic news

By Reshmi Basu and Paul A. Harris

New York, Sept. 2 - Investor positions remained in lockdown ahead of Friday's release of U.S. non-farm payroll numbers.

During Thursday's session, the yield on the 10-year U.S. Treasury notes took its biggest plunge in more than a month as the market now anticipates stronger job creation. Economists are predicting the Labor Department will report 150,000 new jobs for the month of August.

The yield on the 10-year Treasury rose to 4.21% from 4.12%.

Overall, emerging market debt ended softer.

Russia's bond due 2030 was down 0.312 to 95¼ bid. Mexico's bond 2008 lost 0.35 to 115 bid. And the Brazil C bond was down half a point to 97.375 bid while the bond due 2040 was bid at 1053/4, down 1.15.

All about jobs

The performance of Friday's emerging market debt rests on those jobs numbers, according to a buy-side source.

"It's all that anybody cares about," he said. "If the number is very strong, it will probably be a negative for emerging markets, especially as people start building in a more aggressive Fed."

Likewise, a soft number may not carry the same punch, but would be reassuring to the market, he added.

"It goes back to the technicals and the carry trade comfort factors," said a debt strategist.

"And if levered investors like the number, we will probably continue to grind tighter. And if they don't like it, we will have a lot of opportunity to reprice at a wider spread," he said.

Even with so many investors out of the office, the Street will come to play, according to the buy-side source. If the jobs numbers are stronger than anticipated, the market could be more volatile than normally.

"If anything you might see a larger impact because there is less liquidity," said the source.

"People are very focused on that number," he noted.

Brazil's good economic news continues

With a series of strong economic data, Brazilian debt is looking to fare better than its counterparts. More good news surfaced on Thursday as the government forecast a record soy harvest - although the country's debt lost ground in line with emerging markets in general.

"I still like it [Brazil]," said the buy-side source. "The market is looking kind of rich. We are almost back to where we were at the beginning of the year, so that's a big negative.

"On the flipside, the news out of Brazil this week has been very good.

"It's really confirmed our beliefs as to why we were over-weight in Brazil.

"I wouldn't be surprised if there was a correction, but I still think that Brazil will do better than most of EM."

Along with the release of solid economic news, the other big story from Brazil this week were rumors of a seven-year bond issue.

"We expect a fair amount of sovereign issuances this fall," the investor said. "We expect Brazil certainly to be an important part of it.

"The world feels relatively liquid, so if they bring it at the right price the market will accept it," he added.

"It's always a matter of price. Typically, a deal only goes badly if it's priced too aggressively or there is some sort of misunderstanding."

But there will be demand, given that October will be a big coupon payment month.

"The money is around," said a debt strategist.

"Certainly, the recent bevy of news releases has been very positive for the Brazilian story," he added.

Yes on Russia, says investor

According to the buy-side source, Russia is another credit worth owning.

"I still like Russia. I think Russia offers a good value, especially relative to other emerging markets," the investor said.

This week, the Russian government announced that is considering converting its Paris Club debt into bonds, raising supply issues. According to the Russian finance ministry, debt owed to the Paris Club of creditors will amount to $46.7 billion at the beginning of 2005.

More paper raises concerns that the market may be oversaturated with too much Russian paper, such as happened with the Aries deal earlier in the year.

Aries Vermogensverwaltungs GmbH sold €3 billion and $2.4 billion of notes backed by Russian Paris Club debt on July 1, depressing Russian paper.

"For a medium-term holder, maybe you have a better chance to buy it. The bonds are just cheap," said the buy-side source.

"The EMBI is yielding 8.47%. You can buy the Russian Aries bond at 7.90%.

"You are talking about something that's almost a full letter higher in credit rating relative to the rest of the emerging markets," he added.

Furthermore, five-year bonds from Russian corporates are yielding 8¼% to 8½%.

"I would rather buy that than bet on Venezuela," he noted.

Techtronic plans deal

In the primary market, Techtronic Industries Co. plans to sell $300 million of global bonds that would mature in a seven to 10 years.

Underwriters and timing remain to be determined.

Proceeds will be used to help fund the $713 million acquisition of Stockholm, Sweden-based Atlas Copco Group's electric tool business, including Atlas Copco Electric Tools, of Germany, and Milwaukee Electric Tool, in the U.S.

Hong Kong-based Techtronic Industries is a supplier of home improvement products and tools, including Ryobi power tools.

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