Emerging market debt gains on more LatAm buybacks; Philippines holds steady

By Reshmi Basu and Paul A. Harris

New York, Feb. 27 - Emerging market debt continued to gain momentum Monday as Colombia and Venezuela announced their intention to buy back dollar-denominated debt.

In the Philippines, external debt appeared to hold steady as political noise eased over the weekend.

During the session, the Philippine bond due 2025 moved up 0.50 to 129.125 bid, 129.50 offered.

On Friday, Philippines president Gloria Macapagal Arroyo declared emergency rule after the military said it foiled a coup attempt.

Elsewhere, Thailand bonds also seemed to stabilize. There is increasing clamor for prime minister Thaksin Shinawatra to resign. Shinawatra called for a general election on April 2 after he dissolved parliament last Friday. He has come under increasing scrutiny after his family sold its stake in Shin Corp. to Singapore's Temasek Holdings last month.

At session's end, the Thailand bond due 2013 was down 0.09 to 107.48 bid, 108.434 offered.

LatAm buyback bender

Latin America appears to be on a buyback bender.

During Monday's session Colombia said it would buy back up to $4.2 billion of bonds. And over the weekend, Venezuela announced that it would retire $3.9 billion of outstanding par and discount Brady bonds as well as repay $813 million of multilateral and bilateral loans.

These two moves followed Thursday's announcements in which Brazil said it would redeem

$6.64 billion of Brady bonds while Mexico launched a tender offer for $5 billion in foreign currency bonds.

Diminished supply in Latin America translated into another record-breaking session as the asset class took the U.S. Treasury weakness in stride.

Spreads for the JP Morgan EMBI+ narrowed to 181 basis points more than U.S. Treasuries. The spread on the EMBI Global Index narrowed by five basis points to 192 basis points.

Meanwhile Venezuela was the outperformer of the day as its spreads tightened by 14 basis points.

The buyback news also helped Colombia. Sentiment was also boosted by news that the country signed a free trade agreement with the United States. The Colombia bond due 2012 added 0.25 to 121.60 bid, 121.85 offered. Spreads for Colombian debt tightened by nine basis points.

In other news, Argentina sold $300 million of Boden bonds due 2012 to Venezuela. At session's end, the 2012 Boden added 0.34 to 93.60 bid, 93.829 offered. The Argentina par bond due 2038 gained 0.50 to 40.25 bid, 40.50 offered. Spreads for Argentina narrowed by 11 basis points.

During the session, the Brazilian bond due 2040 added 0.45 to 133.40 bid, 133.50 offered.

Nonetheless, sources described the trading session as slow, given the Carnival holiday in Brazil.

Spreads to tighten in 2006

Moreover, the buybacks are even causing some to re-adjust their year-end forecast, said one market source.

The source noted that JP Morgan had narrowed its target range for the EMBI Global Index to 175 to 200 basis points from 200 to 250 basis points, citing positive inflows, better current accounts and the growing dependence on local markets for financing needs.

The announcements of the buybacks are not surprising because the market expected some sort of debt liability management program from Latin American countries this year, noted market sources.

But what is surprising is that it happened so soon in the year and before the onslaught of elections.

"It's early in the year for them to announce things like this," said Enrique Alvarez, Latin America debt strategist for IDEAglobal.

"And in particularly, it's taking away from the possible election pressure," he said, adding that in the past, Latin American countries would not have timed such buyback announcements in front of elections.

Furthermore, sources have said that election uncertainty was one of their major concerns heading into this year as Latin America votes. But these buybacks are serving to alleviate the risk, noted Alvarez.

"If you look at price and debt levels, that is definitely a direct translation of what is going on. We continue to score historical new highs in prices," he said.

Investors will need to look at countries on an individual basis with Peru, Ecuador and to a lesser degree Mexico serving as more of the worry spots, he noted.

"This electoral noise is slowly being pressed out of the market," Alvarez added.

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