Emerging market debt bounces back on rally in core markets

By Reshmi Basu and Paul A. Harris

New York, June 1 - Emerging market debt saw higher prices Thursday as core financial markets recovered on the prospect of a slowdown in the U.S. economy.

Investors interpreted a series of weak economic numbers out of the United States as further reinforcement for the argument that the Federal Reserve will pause its current monetary tightening campaign.

"Markets had a little bit of a bounce today [Thursday]," replied a trader, who added that emerging markets debt had erased most of the losses posted in Tuesday's session, which saw a heavy sell-off on the back of global equity weakness.

"Most markets are bouncing back. Global markets are more positive today [Thursday]. Local Brazilian and Latin American equity markets are all up pretty good. Currency seems stable," he noted.

The positive backdrop helped emerging markets post higher returns. During the session, the Brazilian bond due 2040 added 1.20 to 123.05 bid, 123.5 offered. The Ecuadorian bond due 2030 gained 0.90 to 98.75 bid, 99.50 offered. The Turkish bond due 2030 moved up 1.25 to 143.625 bid, 144 offered.

Another trader agreed that the tone was considerably better but he warned that the market still lacks stability.

"We had a reasonably good session, but confidence is not particularly strong," according to a trader who focuses on Asian fixed income.

He noted that Wednesday's session saw an improved tone from the prior day. But then the Asian market on Wednesday sold into that strength, which signaled that there still are plenty of jitters out there.

But, he added: "It feels as though the market is trying to establish some foundations."

Meanwhile the first trader noted that Thursday's positive tone comes after a prolonged sell off and that investors may be looking to recoup some of their losses.

Philippines, Asia up for year

Over to Asia, the Philippines and Indonesia are still reasonably well up for the year, according to the second trader.

However, he noted that benchmark high-grades in the region are for the most part flat for the year.

So far in 2006, he described trading as choppy.

The market has been much tighter, and while there have been instances of spread widening, the most recent correction has been the most severe.

"It has not been an easy market to trade."

He offered three examples to demonstrate exactly how shaky this market has been. On the higher-beta, high-grade side, Japanese bank capital issues are 30 basis points wider than their tights.

Furthermore, Hong Kong's Hutchinson Whampoa Ltd. Co., which is seen as a reasonable bellwether for the higher-beta high-grade paper, is close to 20 basis points off the tights on the long end of the curve.

And the third example is the Philippines, which has seen its five-year credit default swaps kick out by as much as 70 basis points from the tights in just a span of three to four weeks.

"There have been some pretty extreme moves, in terms of widening."

Real money seen sidelined

Moreover, there is a stash of real money sitting on the sidelines, the trader said. But until a number of different markets see stability, that cash will stay there.

"As you talk to different people in different markets right now everyone is blaming everyone else for the weakness," noted the second trader.

Among the culprits receiving blame for the market's weakness are equity markets, commodities and volatility in interest rates. And the list goes on, he noted.

In the near term, the market participants will want to see some signs that equities are stabilizing and that the extreme volatility in commodities is beginning to settle down.

Additionally, investors need to have a little more comfort with the interest rate environment, which served as one of the early catalysts to the sell-off.

"And there seems to be uncertainty with each piece of [U.S] data that comes out," the second trader told Prospect News.

In the primary market, the trader noted that a couple of high-yield deals were postponed last week.

"A lot of the high-grade is done off the shelf, so as the market stabilizes it can get done pretty quickly.

"But it's not going to happen any time soon," he predicted.

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