Emerging market debt spreads tighten ahead of Fed meeting; high crude prices push up oil credits

By Reshmi Basu and Paul A. Harris

New York, Aug. 9 - It was a quiet Monday ahead of Tuesday's Fed meeting but spreads were overall tighter for emerging market paper.

"It's good today [Monday]. Credit spreads are tighter pretty much across the board," said a buy-side source.

"Maybe Turkey is a bit tighter than anything else.

"Waiting for the Fed tomorrow, but a good feeling from Friday," said the source.

Emerging market prices soared Friday on poor U.S. jobs data. The Labor Department said the economy created 32,000 jobs, falling far short of analysts' expectations of 240,000 jobs created.

And those weak job numbers have prompted some to consider increasing their exposure in emerging markets.

"We are actually considering looking at adding more to emerging markets," said the buy-side source, adding that it would probably be in the high beta names such as Turkey, Brazil and Colombia.

"If interest rates stay low, then emerging markets are okay. And then you want to be in the country that offers you the highest coupon."

The general consensus is that the Federal Reserve will increase rates by 25 basis points at the Tuesday meeting. But July's weak job data has analysts wondering whether or not the central bank will skip a rate hike increase at its Sept. 21 Federal Open Market Committee meeting.

"They are interested in what the Fed will have to say regarding the perceived softness in the economy and how they will copy with that," said Enrique Alvarez, Latin America debt strategist for think tank IDEAglobal.

Overall, the JP Morgan EMBI Index was flat during Monday's session. Its spread to Treasuries tightened six basis points to 461 basis points.

The Brazilian C bond was down half a point to 94¾ bid while the bond due 2040 was bid at 99.65, down 0.10.

Sino Forest price talk

In primary action, price talk is 9%-9¼% on Sino-Forest Corp.'s planned sale of $200 million to $300 million of seven-year guaranteed senior notes (Ba2/BB-) via Morgan Stanley.

Books closed earlier Monday in Europe and Asia. The book size is up to $550 million.

The deal is expected to price Tuesday.

The Mississauga, Ont.-based company is a producer of logs, wood chips and engineered wood products from plantations in East Asia.

Ecuador, Peru up, Argentina down

Latin American trading was lackluster with very little overall variation in prices during Monday's session, according to IDEAglobal's Alvarez.

"The market hasn't had a whole lot of change spread-wise or return-wise."

However, Alvarez said notable events including high oil prices gave a lift to credits such as Ecuador and Peru.

Crude oil prices shot up on continuing concerns over Yukos and an export stoppage in Iraq. Prices went up as high as $44.98 a barrel on the New York Mercantile Exchange before easing to $44.84, a record close.

"Crude oil is blowing the market away - that in turn has allowed Ecuador to gain again on the day," said Alvarez.

"Ecuador has been the front burner.

"Peru has also seen good interest. It has been one of the better performers here, but I think that is more in sync with the overall momentum we saw on Friday. There hasn't been anything positive from there on the domestic front."

The Ecuador bond due 2030 was up a quarter of point to 75½ bid Monday.

Meanwhile, political risk is reducing the impact of oil prices on Venezuelan paper.

On Sunday, populist leftist leader President Hugo Chavez led a rally of hundreds of thousands of supporters. He said a vote against him in the recall referendum would be a vote for American imperialism.

To recall Chavez, the opposition must equal or beat the 3.76 million votes he received when he was reelected in 2000.

If Chavez loses the referendum, a presidential election will be held within 30 days.

"I think it's [high oil prices] been somewhat less influential on Venezuela because we are in the countdown toward the referendum on Sunday.

"People are starting to get a little antsy there," said Alvarez.

Firmly on the downside, Argentina's paper fell on its continued stand-off with the International Monetary Fund.

Argentina is drawing on reserves to avoid defaulting to multinational lenders after the IMF withheld a $728 million payment in July. The IMF has been displeased with the progress over negotiations over its 2001 default.

Economy Minister Roberto Lavagna said the government will not proceed with talks with the IMF in September over its review.

"They are essentially going to pull away from the IMF," said Alvarez.

The lack of pressure from the IMF does not bode well for negotiations with creditors.

The Argentina bond due 2008 was down half a point to 27 bid in trading Monday.

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