Emerging market debt trades in ranges; Colombia down on pension fears; Brazil's central bank steps in

By Reshmi Basu and Paul A. Harris

New York, Dec. 6 - Emerging market debt traded in narrow ranges Monday while Colombian paper came under pressure from a change in the country's pension rules.

"It was a very quiet day," said a trader. "Prices didn't move a ton."

"After the big move on Friday, we just stabilized at these prices and not much has changed," he said.

During Friday's session, emerging market debt rallied on lower-than-expected non-farm payroll numbers, which helped alleviate fears that the Fed would accelerate its tightening policy.

"After a big Friday, everyone is kind of spent. It's just a generic Monday trading day in EM. Not much going on."

Overall, emerging market debt was up. The JP Morgan EMBI+ Index rose by 0.42%. Its spread to Treasuries narrowed four basis points to 372 basis points.

"The market pushed a little higher," said Enrique Alvarez, Latin America debt strategist at think tank IDEAglobal.

"You had a little bit better performance again in the U.S Treasury market," he said.

It was day two of the U.S Treasuries rally. The yield on the 10-year noted stood at 4.24% at the end of Monday's session.

Brazil's Central Bank intervenes

In other news, Brazil's Central Bank bought dollars in order to rein in the rally in its currency, which has been harming exports. The central bank said it sold the local currency at an exchange rate of 2.715 reais to the dollar.

"I think what's intriguing for the market is the intervention by Brazil," said Alvarez. "The overall rally there has stopped in its tracks - at least on an intraday basis.

"Also the dollar has come back a little bit from its very defensive position on Friday and you see it trading below $1.34 on the euro.

"So essentially, the big influence, which was the real large currency appreciation we were seeing in Latin America, has cooled somewhat, so that hasn't let the market carry very far forward.

"Nonetheless, you've had a positive influence on the [U.S] Treasury side, so you've been able to inch a little bit higher," he said.

The Brazilian C bond added 0.187 to 101.312 bid while the bond due 2040 added a quarter of a point to 116.050 bid.

Another noteworthy event was the exit of Venezuelan finance minister Tobias Nobrega on Sunday, according to Alvarez.

Last week, Nobrega said at a conference in New York that the government, which set a fixed exchange rate in early 2003, would devalue the bolivar in January.

"It was speculated that he would resign. It was a very bizarre coincidence that he comes to New York and says something about devaluation and then gets ousted very shortly afterwards," added Alvarez.

The Venezuela bond due 2027 fell 0.30 to 103 bid in trading Monday.

President Hugo Chavez replaced Nobrega with Nelson Merentes, the economic development minister and state development bank president.

Not very bullish, says trader

Looking ahead, pre-holiday emerging market trading may not sizzle on expected high oil prices and a weak U.S dollar, according to another trader.

"We saw a lot of fluctuation late last week. Oil prices seem poised for a comeback on the news that there are disruptions in Norway and Nigeria, and on reports that OPEC is considering production cuts in response to the recent softness in crude prices.

"And the dollar is continuing to fall.

"We might see some kind of Christmas rally, I suppose, but other than that it's hard to find reasons to be bullish," he said.

Colombia changes pension fund

The superintendent of banks in Colombia did away with "at maturity" account enjoyed by pension funds, which made local investors nervous during Monday's session.

"Pension funds are allowed to evaluate certain funds that they carry. They used to have funds that were basically till-maturity funds, which they could put in assets and hold them at nominal value all the way up to maturity without having to mark them on the market," said IDEAgloba's Alvarez.

"There has been something published over the last couple of days that now obligates them to mark to market in their portfolios. Since they have an interesting amount of Colombian global bonds included in that, and if you look at prices of globals in Colombia, the majority of them are way over par.

"They are now faced with the following: they are going to have funds which have very inflated values but also leave them exposed to the downside looking forward in 2005.

"So the locals are a little worried about the shift in allocation flows from local pensioners," he said.

In order to safeguard their holdings, locals sold off their paper. The Colombia bond due 2012 fell 1¼ points to 113 bid while the bond due 2033 slipped half a point to 113 bid.

Pays to be in EM, says investor

If one makes a comparison between the Merrill Lynch high yield index relative to the emerging markets index, investors get paid more to be in the emerging markets, according to a buyside source.

"Right now your average EM credit is higher rated than your average high yield credit: The Merrill Lynch Emerging Markets Index Plus has a mean credit rating of Ba3. And the Merrill Lynch U.S. High Yield Master II has a B1 rating," said the source.

"In emerging markets, you have seen more upgrades, so it makes sense.

"And the weak dollar and high energy prices are actually good for emerging markets because countries like Russia, Venezuela and Ecuador are all big exporters of oil. And the same reason that a weak dollar can help the U.S, as long as it doesn't trigger inflation, any country that is pegged to the dollar gets the same benefits," added the buyside source.

"So the economic news is relatively positive out of these countries, and the weak dollar is not going to undermine that," said the buyside source.

Also, financing needs are much diminished for the next year due to all the activity this year.

"I think Mexico is done refinancing all the way through 2006," added the source.

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