Emerging markets falls as U.S. Treasuries plunge; Brazil issues $1 billion 10-year bonds

By Reshmi Basu and Paul A. Harris

New York, Feb. 28 - U.S. Treasuries tripped up emerging market debt Monday, while Brazil chose to tap the primary market for the third time this year.

Treasuries have been on the defensive of late, as threats of inflation are seen as becoming louder in the United States. And more inflation noise was heard Monday as the core personal consumption expenditure price index jumped 0.3%, the biggest gain since 2001.

Also adding more jitters, the Chicago purchasing managers index expanded slightly above expectations. The index read 62.7%, as improvements were seen on all fronts such as production, news orders and employment.

In response to the growing inflation concerns, the yield on the 10-year Treasury note rose to 4.36% from 4.27% on Friday.

Meanwhile, the Treasuries plunge pulled down emerging market debt. The Brazil C bond lost half a point to 101.562 bid while the bond due 2040 fell 1.55 to 115¼ bid. The Mexico bond due 2009 lost 0.60 to 120.30 bid. The Russia bond due 2030 slipped 0.563 to 104.937 bid.

There was notable selling in emerging markets trading accounts on the back of the Treasury sell-off when the 10-year broke 4.30%, according to a market source.

Brazil sells $1 billion 10-year notes

Despite Treasuries' slide, the Federative Republic of Brazil came to market with $1 billion of 10-year global bonds (B1/BB-), selling them at 98.829 to yield 7.90%.

Unfortunately for Brazil, the personal consumption expenditure report came coincidentally with the bond offering, said Enrique Alvarez, Latin America debt strategist for IDEAglobal.

"I don't think the timing was bad," said Alvarez, referring to the possibility that other economic data on the way could cause a bigger market disruption.

"I think they were trying to take advantage of a stable market. The market had been drifting laterally. Treasuries seem to want to go to the high end of the present range," he said.

Furthermore, it was wise to come before Friday's non-farm payroll numbers in the United States, which could send the Treasuries into a tailspin.

Nonetheless, the pressure in the Treasuries market forced Brazil to give some extra yield.

The deal was launched at a 7.90% yield, after widening from initial price guidance of 7.85%.

An investor note said that the five basis points extra reflected the move in U.S. Treasuries since the announcement of the deal.

"It was the unforeseen PCE that may have cost them a little of money," noted Alvarez.

The deal went pretty well, said a buyside source.

"It wasn't that that cheap to the curve," the source commented. "We got some color that it probably is going to be something that will appeal a lot to hedge funds because of the low dollar price and probably because the bullet structure might make it easier to trade."

Nonetheless, the new issue announcement strengthened the already circulating worries that Brazil may move to call its C-bonds, according to the market source.

Citigroup and JP Morgan managed the sale of the Securities and Exchange Commission-registered notes.

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