Emerging market debt down as investors await jobs data; Peru's €650 million deal talked at 7½%-7 5/8%

By Reshmi Basu and Paul A. Harris

New York, Oct. 5 - Emerging market debt was slightly down in another thin-trading day as investors anxiously awaited Friday's release of U.S. non-farm payroll numbers.

"No one is really going to change it up before then," said a trader.

The market is anticipating that the numbers will show 150,000 jobs were created in September.

If the number comes in much higher than that, Friday will prove to be extremely volatile, the trader added.

"The market has been a little bit hairy in the past couple of days," said a Latin America debt strategist at Refco EM.

"I think the feeling is that people don't want to go long or stay too long," he said. "You see low volume and lower prices."

During Tuesday's session, Russia's bond due 2018 was bid at 131 5/8, up 7.8. The bond due 2028 was up 1¼ to 53 1.4 bid and the bond due 2030 was bid at 96.18, down 0.313.

Paper from Brazil and Mexico was down while Venezuelan bonds continued to benefit from high oil prices.

The Brazil C bond lost 0.313 to 99.687 bid while the bond due 2040 fell 0.40 to 113.60 bid. The Mexico bond due 2008 dropped 0.050 to 114.45 bid or 143 basis points over the 2-year Treasury.

"Venezuela was once again the exception today [Tuesday]," said the debt strategist.

"It was higher 50 basis points to a point. The price of oil is behind the rally in Venezuela," he said.

The Venezuela bond due 2027 was up 0.30 to 100.60 bid or 425 basis points over the 30-year Treasury during Tuesday's session.

All eyes on Friday's job numbers

Prices are expected to drift lower ahead of the critical jobs data, according to the debt strategist. He said he would not be surprised if the market moved 100 basis points lower from now until Friday's morning release of the payroll numbers.

"My expectation is that it is not going to be as positive as the market in the U.S. is forecasting," the strategist said.

"I think that is going to give a little support to prices in emerging markets in the short term," he commented.

He also added that in the medium to long term, paper from Venezuela has value at the current level of oil prices, noting that there should not be a drastic price change over the next few months.

"I like the story in Ecuador, which has a lot more volatility but the same drivers.

"And Mexico begins to become more attractive if there is an upgrade by the ratings agencies," said the strategist.

"It is possible that before the end of the year, we see an upgrade in Mexico's foreign debt. That is also a possibility due to the improving balance of payments, currents accounts and the relationship to the U.S. economy.

"That will give a pop to the prices," he noted.

However, generally, even with recent upgrades for countries such as Brazil and Venezuela, the market is currently a little rich and spreads are too low, according to an emerging market analyst.

"But new cash inflows, amortizations and coupon payments, and the constant search for yield should keep EM well bid or now," he said.

"Too much new issuance in October could upset the market, though, and any serious turnaround in U.S. interest rates could also undermine sentiment.

"10Y U.S. Treasuries yields have risen a little over the last week, but they are still below 4.20%.

"A clear break above 4.40% might upset EM, but until then the market should continue to enjoy the bid for yield."

Peru sets price guidance

Price talk is 7½%-7 5/8% on Peru's planned offering of €650 million of 10-year senior notes (Ba3/BB).

Pricing is expected on Wednesday.

JP Morgan is the bookrunner for the registered deal.

Otherwise the Latin American new issue pipeline is really quiet right now, said a market source.

"The only deal that's out there right now is the Codelco [$500 million via Citigroup], which should be coming in the next week or so," noted the source.

But there are rumors of other potential deals floating around, according to a market source.

Brazil (B1/BB-) is expected to issue more paper to continue pre-funding of its needs for 2005.

Multilateral lending agency Corporación Andina de Fomento (CAF) is expected to raise $1 billion in 2005, but may issue in 2004.

And away from Latin America, Philippines (Ba2/BB) and Turkey (B1/BB-) are expected to tap capital markets before the end of the year.

Argentina defiant on exchange

Argentina will not cave in its negotiations over $100 billion defaulted bonds, according to president Nestor Kirchner. But he added that the country would act quickly.

"We are working hard to achieve the response that our people deserve, without backing down, without falling to our knees," Kirchner said in a speech.

In June, Argentina said it would pay investors 25 cents per $1 of defaulted debt, as measured by discounted present value of the bond payments. Bond prices moved higher on rumors of a slightly juicier deal.

"There are a couple of issues here," said the Refco strategist.

"The market is expecting a little improvement on the offer by the Argentine government. The rumors are between five to six cents of the face value of a dollar, so we're talking in the 30s."

Some of the conditions that are attached to the debt-restructuring proposal, such as GDP performance, are tied to the recovery of the economy and the improvement in the balance of payments, he said.

"Those are becoming more attractive than a year ago when we didn't know which direction the Argentinean economy was heading.

That has added some extra value to the restructuring proposal, he noted.

Furthermore, the market wants to find a resolution to the standoff, given the rally in Latin America and the many options the Argentine government has regarding its corporates and sovereign paper.

"The market wants to get it over with and then start playing with what's available.

"I think that's technically important because the market doesn't want to wait another two to three years for restructuring to take place when emerging markets overall are improving.

"And then when you have the opportunity to take advantage of some of the corporates that are making some money," he added.

The Argentine bond due 2008 fell 0.40 to 31.10 bid in trading Tuesday.

Latin corporates mostly flat

Meanwhile Latin American corporates were unchanged during Tuesday's session with the exception of a few issues.

Mexican ¹s steel company Altos Hornos de Mexico's bond due 2004 was up 2½ points to 33 bid, 35 offered.

Mexican glassmaker Vitro SA de CV saw its bond due 2007 rise ¾ to 100 bid, 101 offered. Its bond due 2013 gained one point to 94 bid, 95 offered.

And Brazilian ¹s power generator Companhia Energética de São Paulo's bond due 2008 added half a point to 100 bid, 101 offered.

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