Emerging market debt lower on dollar basis; Ecuador, Venezuela improve

By Reshmi Basu, Paul Deckelman, and Paul Harris

New York, Jan. 12 - Emerging market debt succumbed to profit-taking Friday amid an abbreviated trading session ahead of a holiday weekend in the United States.

A trader in Latin American issues said that the market was "very strong, and tightening," citing the stabilization of global stock markets as a key factor, along with spreads on emerging market bonds "rallying right back" after losses earlier in the week.

In the previous session, emerging market debt petered out at the end of the day, unable to extend an early morning bounce. In recent days, lower commodity prices, weaker U.S. Treasuries and market-unfriendly developments on the local front have tested investors' appetite for risk.

Ecuador up on cabinet appointment

But on Friday, sentiment improved for some of this week's underperformers such as Ecuador and Venezuela.

Overall, spreads tightened by 4 basis points although on a dollar basis, the market declined.

Ecuador posted a solid performance on the back of a market-friendly appointment in the finance ministry.

Former deputy finance minister Fausto Ortiz, who opposes debt default, has accepted the position of vice minister of finance.

That appointment came as a relief to investors, which led some to cover their shorts, according to an analyst.

In trading, the Ecuadorian bond due 2012 moved up 2 points to 83 bid, 85 offered.

Elsewhere, the trader noted that Argentina's bonds, in particular, were "very strong. "Currencies are rallying, and the market overall is in very good shape."

In trading, the Argentine discount bond due 2033 gained 0.25 to 111.45 bid, 111.75 offered. Meanwhile the country's peso-denominated bonds "were very strong," according to the trader.

Brazil's paper, among others, was also "pretty steady."

During the session, the bellwether Brazilian bond due 2040 gave up 0.05 to 132.30 bid, 132.35 offered.

Venezuela continues to see firmness

Turning to Venezuela, the country appears to have reversed course from recent losses, as its debt posted gains for the second straight session.

During trading Friday, the Venezuelan bond due 2027 added 0.30 to 123.60 bid, 124.10 offered.

Referring to the controversial pronouncements earlier this week from president Hugo Chavez that he would seek the nationalization of that country's electric power and telecommunications industries as part of an overall move towards socialism, the trader opined that "the political noise [like] the Venezuelan stuff is not really the driver here" for the overall Latin American market.

He added that the rise in Latin EM debt was more about "the flows, and the stock markets catching a bid and stabilizing."

Chile better after rate cut

For instance, while Chilean paper was firmer after that country's central bank surprised the financial markets with its first cut in its overnight lending rate in three years, the trader said "it was just bid [because] everything was bid," explaining further that "nothing differentiated" - there was nothing special driving the firmer tone, but rather, it was strong because everything was strong.

Other market-watchers, however, seeing the yield on Chile's benchmark 10-year peso bond having fallen 22 basis points to 5.42% - its lowest since November 24 - linked that tightening to the central bank's move late Thursday trimming the key interest rate by a quarter-percentage point to 5.0%.

It was the first such rate cut since January 2004. Finance minister Andres Velasco said Friday that the decision to cut overnight rates "was made in a context of lower inflationary pressure and a lower oil price, which create conditions for monetary policy to be more expansive and support growth."

Shares on the nation's bourse in Santiago rose on expectations that lower interest rates will cut companies' costs of borrowing money, while the country's peso eased 0.2% versus the dollar, which could help exports of such important products as copper and wine.

Mexico keeps losing

Moving to Mexico the country said it will issue $2.27 billion of a re-opened global bond due 2034 in exchange for five existing bonds, which come due in 2019, 2022, 2026, 2031 and 2033.

This week, the nation's external's debt saw wider spreads as crude oil prices neared an 18-month low. On Friday, Mexico's curve continued to see red, according to another market source,

During the session, the Mexico bond due 2034 gave up 0.10 to 106.35 bid, 106.65 offered while the 2033 bonds shed 0.60 to 126.60 bid, 127.10 offered.

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