Emerging market debt unchanged on day; Fed official renews interest rate fears

By Reshmi Basu and Paul A. Harris

New York, Aug. 22 - Emerging market debt was virtually unchanged on a dollar and spread basis Tuesday in the absence of any catalysts to push the asset class one way or another.

However, the backdrop to trading was less supportive on hawkish comments by a Federal Reserve official. Earlier in the session, U.S. stocks rose on news that Iran would start "serious negotiations" on its nuclear program, but those gains were capped following remarks by Federal Reserve Bank of Chicago president Michael Moskow, who warned that the central bank may resume monetary tightening to combat inflation.

U.S. Treasuries also eased. And the Dow Jones Industrial Average index lost 5.21 to close at 11,339.84 while the yield on the 10-year note stood at 4.82% compared to 4.81% before his comments.

Meanwhile with so many market participants on vacation and trading desks being reduced to skeleton crews, liquidity has dwindled to a slow drip across the emerging market asset class.

Latin American bonds saw little trading activity on Monday and that trend continued into Tuesday's session, according to market sources. Mexico was the day's winner while Argentina was the loser. Mexico saw its component of the JP Morgan EMBI Global index tighten by two basis points while Argentina's portion of the index saw spreads widen by six basis points.

During the session, the bellwether Brazilian bond due 2040 lost 0.10 to 130.20 bid, 130.30 offered. The Argentinean discount bond due 2033 eased 0.85 to 97.10 bid, 97.75 offered. The Colombian bond due 2033 was unchanged at 136.50 bid, 137.50 offered. And the Venezuelan bond due 2027 slipped 0.10 to 124 bid, 124.50 offered.

Elsewhere, the Russian bond due 2030 gained 0.19 to 110 bid, 111.313 offered. The Turkish bond due 2030 shed 0.25 to 149 bid, 150 offered.

"Trading is light," said a trader.

"The sentiment is still pretty good," he added.

Dwindling volumes are not surprising at this time of year. August has been traditionally the least active month of the year. However, what is unexpected is how tight spreads are following the sell-off seen in May and June, according to a market source.

Dollar prices of sovereigns are at or closing in on their pre-May levels.

The recent rally has been more focused in liquid names while off-the-run credits and corporates have been lagging.

Additionally, Latin American local markets also turned bearish on Moskow's warning.

Mexico's local markets erased gains, seeing a sell-off near the end of the session. The peso lost 0.4%, tracking other emerging market currencies down.

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