Emerging market debt follows Treasuries; Argentina's swap ends

By Reshmi Basu and Paul A. Harris

New York, Feb. 25 - Emerging market debt edged higher Friday as it closely tracked a firmer U.S. Treasuries market.

Treasuries were stronger Friday, as U.S. gross domestic product numbers did not reveal any new inflation concerns.

The yield on the 10-year note stood at 4.27%, down from 4.29% on Thursday.

Overall, emerging market bonds were marginally up, following the Treasuries bounce, said a trader.

The Brazil C bond added 0.12 to 102.12 bid while the bond due 2040 gained 0.45 to 117 bid. The Russia bond due 2030 was up 0.37 to 105.62 bid. The Turkey bond due 2030 packed in 0.245 to 144.37 bid. The Venezuela bond due 2027 moved up 0.05 to 103.60 bid.

Argentina's swap ends

The talk of the day was Argentina, which closed its debt swap for over $102.6 billion in defaulted debt. The estimated loss to bondholders is 70% of the original price of the bonds. But exhaustion and frustration may have pushed investors to give in.

The participation rate is expected to fall between 70% and 80%.

One sellside source said he was surprised, having expected to see a much lower number.

On the trading floor, he heard many guesses. Some have said 60%. Others have said 80%. His guess is between 60% and 70%, which would still leave "Argentina with $40 billion of un-restructured debt, which is the size of Panama, Philippines and throw in another country" he said.

Argentina also had luck on its side, which allowed it to play a shrewd game. The four-leaf clover was low interest rates in the United States, said an emerging market analyst.

"I think the basic message is it's better to be lucky than smart. The smart thing to do would have been to offer a more attractive restructuring in order to push participation closer to 90%, and thereby avoid all the bitterness and costly lawsuits that are ahead," he said.

"But they got lucky - U.S. interest rates are so low, that investors have poured into the exchange bonds simply because they will offer a little more yield than most of the rest of EM. With luck like that, Argentina didn't have to be smart."

During Friday's session, the trader said there was serious buying of the Boden bond, which was up a point, as well as continued interest in gaining long exposure in Argentina.

"The perception is that Argentina will get 70%-plus participation in the exchange. Under normal sovereign circumstances, it would be something that would be very negative. Under Argentine circumstances, it is something that people are getting very bullish about," he noted.

"There are so many disgruntled investors. I think people were forced in. They didn't have a choice. Some people just want to get it done with. It's 0.2% of their portfolio and [they are saying] 'I think I should have gotten 37 [cents to the dollar] instead of 33 [cents to the dollar] - so that's 0.003% of my portfolio - it's not worth fighting over.'"

How much impact the exchange will have on Argentina's ability to issue new paper remains to be seen. The country will obviously have to come with extra yield, market participants say. And while the government may appear to be getting away with a shoddy deal, corporate borrowers may ultimately pay the price.

"Argy won't have to hit the external debt capital markets for fresh cash for years after the restructuring, so I don't think they'll really be concerned about lingering bitterness," said the analyst.

"The real question is whether investors will hold it against Argentine corporates who'd like to come to market, and I think the answer there is that, in this bullish environment, investors will be quick to forgive Argentine corporate issuers for the sins of the sovereign," he added.

The preliminary results are expected on Wednesday or Thursday. Final results will be announced on March 18.

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