Thin trading volume for emerging market debt; Brazil's currency posts gains

By Reshmi Basu and Paul A. Harris

New York, Feb. 9 - Emerging market debt drifted during another quiet session, as the U.S. Treasury market roared on a successful day two of its quarterly refunding.

Investors turned out for the Treasury Department's auction of $15 billion of five-year notes. The notes were sold at a yield of 3.618%.

The success helped push the yield on the 10-year U.S. Treasury note below 4% for the first time since October. The 10-year note closed at 3.98%, down from 4.02% on Tuesday.

Meanwhile, emerging market paper glided in an illiquid market in wake of Ash Wednesday and, in Asia, Lunar New Year festivities.

Volume has been thin all this week, said a trader.

During Wednesday's session, the Brazil C bond added 0.055 to 102.90 bid while the bond due 2040 gained 0.35 to 118 ½ bid. The Mexico bond due 2009 lost 0.20 to 121½ bid while its bond due 2034 moved up 0.10 to 105.55 bid.

The Russia bond due 2030 was down 0.19 to 107.05 bid. Turkey's bond due 2030 added 0.12 to 146.37 bid. And the Venezuela bond due 2027 added 0.45 to 103.35 bid.

The primary market was shut off, said a sellside source.

The climbing real

Despite continued government intervention, the Brazilian real climbed 1.1% against the dollar Wednesday.

The Central Bank has used some intervention and monetary tools to curb the level of appreciation, but to no avail.

The real will continue to move up, according to a Latin America debt strategist at Refco EM.

"The force that is moving the currency market in Brazil has to do with the inflow of money from short-term portfolio managers, fund families and export levels," he said.

In the short-term, the debt strategist does not see the real flirting with the R$2.70 level. Instead it will move between R$2.57 to R$2.63.

The appreciating real is having an effect on emerging markets, he said.

"But it's also a consequence of the improving perception of risk in emerging markets and Brazil. And that definitely has a strong correlation with the currency and what is going on with the market overall."

Judge rules in favor of Mendoza

There has been more demand for corporate paper than sovereign paper, said the strategist.

"You've seen a lot of demand for Argentinean paper - as expected," said the strategist.

"There is a feeling that if the exchange [of defaulted sovereign bonds] goes through, corporates will rally."

Paper from non-state bank Grupo Galicia and natural gas company Transportadora de Gas del Sur SA have seen higher bids.

Meanwhile, in a highly watched case, U.S. district judge Harold Baer ruled that Argentina's Mendoza province could move ahead with its exchange of $250 million of defaulted bonds for new paper.

In the case, Greylock Capital had argued that the province could not force investors to accept changes to the bonds as part of the swap. The Manhattan judge disagreed.

In the bigger picture, it may mean that the Argentine government has an upper hand in its debt swap, since the courts may not be an option for investors, according to a market source.

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