Emerging market debt drifts lower on U.S. Treasuries' rally; Brazil's non-issue roadshow

By Reshmi Basu and Paul A. Harris

New York, Aug. 31 - Emerging market paper was softer Tuesday as U.S. Treasuries rallied on growing concerns over the strength of the U.S. economy.

Data on consumer sentiment and regional manufacturing fell below expectations, providing more evidence that the U.S. economy may be facing more troubles than just a "soft spot."

The National Association of Purchasing Management in Chicago reported that its manufacturing index dropped to 57.3 in August from 64.7 last month.

And the Conference Board's consumer sentiment indicator fell to 98.2 from 105.7 in July.

The yield on the 10-year Treasury landed at 4.12% during Tuesday's session, the lowest since April.

"EM spreads widened by about four [basis points]," said a trader. "Things are sort of soft," he added.

Russia's bond due 2030 was down 0.123 to 95¼ bid, widening eight basis points to 293 basis points. The Mexico bond due 2026 widened seven basis points to 224 basis points. Turkey's bond due 2009 widened one basis point to 326 basis points.

Brazil's GDP shines, but bonds fall

Brazil's gross domestic product surged 5.7% in the second quarter. But the strong numbers did little to perk up its bond prices Tuesday.

The C bond fell 0.188 to 98.062 bid while the bond due 2040 fell a quarter of a point to 107 bid.

"It's one more sign that the economy is really recovering," said the buy-side source.

"But the news today [Tuesday] in Brazil is the non-deal roadshow that is expected to take place next week."

The roadshow will start in Europe beginning Sept. 6. It will stop in Germany and London on Monday and Tuesday.

"It's just a team from the Central Bank and the Brazilian Treasury," said the source.

"These non-deal roadshows - they always materialize sooner or later into a deal."

Protests greet IMF head in Argentina

Street violence erupted during strenuous discussions between International Monetary Fund's managing director Rodrigo Rato and Argentine President Nestor Kirchner.

Kirchner told Rato that the country would not set aside more money to repay disgruntled bondholders over its 2001defaulted debt.

But neither violent protests nor Kirchner's hardline approach seemed to impact bond prices. The Argentinean bond due 2009 was unchanged at 31½ bid.

Too much Russian paper?

The Russian government 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.

"It's a concern in terms of how Russia is going to handle the whole liability management because if what they are trying to do leads to more issuance of Aries paper - then that's a bad thing," said a buy-side source.

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

"But it seems that they are actually trying to prevent that. So the best resolution for everybody would be an outright buyback of the Paris Club debt."

However, that task is complicated by contract stipulations and legal restrictions, such as having to negotiate with every country separately, said the source.

"There seems to be some legal and operational issues with that, but definitely I think Russia should try to buy back some of that debt and make sure that none of this Aries type structure paper comes to the market.

"And I think that's the ultimate goal. Because they are probably upset about what the new issuance did to their corporates.

"It became more expensive for corporates to issue debt and they are trying to prevent that from happening in the future.

"The Aries deal comes with a spread with Russia," said the buy-side source

"The universe it is competing with is MinFins [Ministry of Finance bonds] and corporates, including Gazprom.

"If you have more supply flooding that part of the curve, it increases the borrowing costs for everybody that is issuing in that universe," added the source.

Latin American corporates flat

Overall, prices for Latin American corporates were flat during Tuesday's session.

Mexican paper product company Corporacion Durango SA de CV's bond due 2009 was unchanged at 56 bid, 58 offered.

Brazilian petrochemical company Braskem's bond due 2008 was unchanged at 106 ½ bid, 108 offered.

And Argentina's Telefonica Movil's bond due 2006 was unchanged at 103 bid, 104 offered.

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