Emerging market debt holds onto gains for second straight day; impasse for Dominican Republic

By Reshmi Basu and Paul A. Harris

New York, March 30 - Emerging market debt rallied for a second straight day as U.S. Treasuries held on to gains on late-quarter buying.

Yields on Treasury notes contracted as investors stepped up their buying before March came to an end.

The yield on the 10-year note stood at 4.55% from 4.59% at Tuesday's close.

Day two of relief

During Wednesday's session, emerging market debt took another breather from the recent sell-off as Brazil and Colombia recorded gains. Counting Tuesday's and Wednesday's session, the market regained more than half of last week's losses, said a sellside source.

The JP Morgan EMBI global diversified index saw a 0.67% return while its spread to Treasuries tightened 6 basis points.

The Brazil C-bond added 0.688 to 98 5/8 bid while the bond due 2040 moved up 0.95 to 110.05 bid. The Colombia bond due 2009 rose one point to 108½ bid while the bond due 2027 gained 1½ to 91½ bid. Ecuador bond due 2033 gained 0.45 to 88 bid.

"In general, the market has had a better tone today [Wednesday]," said Enrique Alvarez, Latin America debt strategist for think tank IDEAglobal.

For the past two sessions, U.S. Treasuries have made inroads as the yield on the 10-year note has fallen to the 4.55% range, said Alvarez, as the Treasury bounce has been the main price driver for Latin America.

"We're not seeing further erosion in Treasury rates. We're actually seeing a reversal there," he added.

"Beyond that, you've actually seen the dollar also stabilize above €1.29 and not make any other attacks towards the €1.28 area against the euro. That in turn has caused the Brazilian real to gain, essentially," he added.

The Brazilian real gained 0.9% to R$2.6755 per dollar, recording the best performance among 16 major currencies during Wednesday's session.

"That's also a positive because remember the domestic markets were really weak during our downfall."

Equity markets experienced a large reversal and local currencies were very weak, remarked Alvarez.

"And that's taken a shift now. That's also sort of underpinned pricing for Latin America.

"That being said, we were extremely overdone in some countries. You see Colombia taking a very interesting bounce."

Meanwhile, the Treasuries rally helped paper outside of Latin America. The Russia bond due 2030 added ¼ point to 101½ bid and the Turkey bond due 2030 surged two points to 133 3/8 bid.

The Philippines' 9½% notes due February 2030 had traded late at 97¼ bid, 97¾ offered. The bonds were up about ¾ point in Asia and up about 1½ points from Tuesday's New York close.

The Philippines' bonds due 2025 were 107.0 bid, 107.375 offered, also up.

Hutchison Whampoa bonds due 2033 were at 193 basis points bid, 188 bps offered, on a spread basis, four to five basis points tighter than Tuesday close.

"Philippines 2030 improved with Treasuries," said a trader.

"I think the fact that the [U.S.] GDP number came out close to expectations took out some of the uncertainty, although some uncertainty remains with regard to the non-farm payroll.

According to the Commerce Department, fourth-quarter GDP grew at an annual rate of 3.8%, less than the 4% consensus.

"Stocks have been strong today [Wednesday]. We were close to an important 1165-level on the S&P, on Tuesday. It wasn't breached, and that was a good sign for the market.

"There was also some strength in Brazil. That bodes well for EM," remarked the trader.

Thus far, stocks scored their best day in 2005. The Dow Jones Industrial Average gained more than 135 points.

Volatility ahead?

But the relief to emerging markets may be short-lived depending on the next round of economic data out of the United States. On Thursday, the personal consumption expenditures index is released, followed by the monthly non-farm payrolls report on Friday.

"I think there is the case for more volatility," said Alvarez. "I think it will all emanate from the U.S. Treasury market."

The data may provide direction on how fast the Fed will act and whether the market will be able to revive the 50 basis point argument that has since been dispelled, he said.

"I think there will be more volatility. I think the market is trying to build a support base here, but it will all be dependent on what happens going forward in the U.S. on inflation," he remarked.

Return of the primary market

The recent market correction has essentially shut down the primary market. Indonesia has pulled the brakes on its $1 billion to $1.5 billion issuance of 10-year paper. Also, South Korea's Dacom is still waiting to price its $300 million notes due 2010 (Ba3 (expected)/BB-) via Credit Suisse First Boston.

The primary market will jumpstart when stability returns to the market, according to the sellside source. Tuesday and Wednesday's rally may be the start of it, he said.

But there also needs to be stability in the high yield and high grade market, which until Tuesday has been performing poorly.

"They were pretty cautious because they are seeing a lot of buying of protection.

"Until that gets settled and people start getting more confident of where things are going, I guess we won't see much supply."

Dominican Republic logjam

Political noise is coming out of the Dominican Republic. There is an impasse between the PLD-administration and the PRD-controlled congress over the authorization of debt issuance, including the restructuring of two global bonds. The external debt authorization has passed the lower house, but still needs the senate approval.

However, partisan wrangling has stalled the agenda.

Senators from the PRD party have indicated that the restructuring could face further blocks. Finance minister Vicente Bengoa announced that solid fiscal results have enabled the government to become current on its external and domestic debts

"They are having problems due to the fact that the [president Leonel] Fernandez administration has decided to investigate a bunch of people from the prior administration - who in turn have blockaded the measure needed in congress to go ahead and authorize the issuance of new bonds," said IDEAglobal's Alvarez.

Alvarez added that a compromise between the two parties is probable.

"Beyond that, it's still up in the air because if the market goes defensive again, you can't ignore what just happened to Ecuador - which instead of calling their bonds, they had to fold away that attempt.

"It's still up in the air as far as what they are going to issue."

Call options for Ecuador bonds expire on Thursday. Ministry of Finance Mauricio Yepez told the press that if present conditions continue, the country would postpone the swap.

Ecuador's swap is dependent on market conditions, noted Alvarez.

"If there is weakness, it will be very difficult to do. If the market is able to stabilize at some point in time and if interest returns on absorbing new supply, then he may be able to get it done.

After the significant sell-off in the last two weeks, Yepez may have to wait before he can judge market conditions.

"There's a parallel here with the Dominican Republic because it is a very high beta credit. It's very high risk. A debt swap for them at this time has a lot less incentive to it from a market standpoint," commented Alvarez.

Argentina wins in court

Late Tuesday night, judge Thomas Griesa of New York's Southern District court unblocked a freeze placed on up to $7 billion of defaulted bonds tendered into the Argentine exchange on the behalf of Cayman Island-based investor NML Capital.

The judge then ruled to keep the freezes in place while creditors appealed the ruling.

The issuance of new bonds in exchange for old, defaulted bonds is very likely to be delayed beyond April 1.

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