Emerging market debt down on dollar basis; low volumes on May Day holiday

By Reshmi Basu and Paul A. Harris

New York, May 1 - Emerging market debt traded lower Monday on a dollar basis in response to volatility in U.S. Treasuries, as the yield on the 10-year Treasury note revisited a four-year high.

Treasuries slipped after U.S. economic reports showed stronger-than-expected inflation and robust manufacturing data, which reinforced the Federal Reserve's case to keep raising interest rates.

By session's end, the yield on the 10-year Treasury note had jumped to 5.13% from Friday's close of 5.06%.

With Latin American, European and other markets closed in observance of the May Day holiday, emerging market volumes were thin. Additionally, the market traded in tight ranges.

"Very slow day," said a trader. "It was a very illiquid day."

Furthermore, Brazilian bonds saw lower dollar prices while its portion of the JP Morgan EMBI+ index narrowed by three basis points to 215 basis points versus Treasuries.

The Brazilian bond due 2040 was spotted down 0.45 to 128.35 bid, 128.45 offered.

One market source observed that many dealers are still short Brazil in hopes of some sort of correction.

While technicals and fundamentals are strong, interest rates are rising and valuations are tight, noted another source.

"Something has to give," remarked the trader, adding: "the market is really expensive."

Many bonds fail to print

Meanwhile many sovereigns barely made a mark. Another trader spotted the Peruvian bond due 2012 unchanged at 111 bid, 111.50 offered while the bond due 2033 was also unchanged at 112.75 bid, 113.25. The Philippine bond due 2025 was also quoted unchanged at 129.25 bid, 129.87 offered.

Other non-movers on a price basis included Russia, Turkey and Venezuela. However, spreads were slightly tighter.

In late afternoon, the Russian bond due 2030 was quoted tighter by seven basis points to 97 bid spread, 94 ask spread. The spread on the Turkish bond due 2030 was also seven basis points tighter versus Treasuries. And the spread on the Venezuelan bond due 2027 was narrower by six basis points to 160 bid spread, 156 ask spread.

Last week, the asset class was able to "show resilience" even as Treasuries sold-off, but with such a heavy U.S. economic data calendar this week, the market is expected to trade in narrow ranges, tracking Treasuries, noted the trader.

He added that many investors were unlikely to add risk ahead of Friday's release of non-farm payroll numbers.

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