Emerging market debt climbs as U.S Treasuries rally; Brazil's Central Bank hikes rates

By Reshmi Basu and Paul A. Harris

New York, Dec. 15 - Emerging market debt trekked up Wednesday while yields on U.S Treasuries hit six-week lows.

For the second straight day Treasury prices were up as the market welcomed the decision by the Federal Open Market Committee to increase the benchmark lending rate by 25 basis points on Tuesday.

The yield on the 10-year note fell to 4.07% from Tuesday's 4.13%.

"Treasuries have been tightening, so the whole [EM] market has been following that trend," said a sellside source.

The Treasury rally coupled with the effect of the Fed decision - which was widely anticipated - has pushed emerging market debt prices higher, he said.

"You can see that the whole EM market has had a big rally in terms of prices.

"But in some cases, there is additional tightening," he noted, citing specifically Brazil and Ecuador.

Another source said there was spread tightening in Brazil, Russia, Turkey and Colombia.

Overall, the JP Morgan EMBI+ Index rose 0.64% while its spreads tightened six basis points to 370 basis points.

Brazil's Central Bank lifts rates

As expected, Brazil's central bank raised its benchmark lending rate by 50 basis points to 17¾% in a move intended to curb inflation.

"Brazil, as always, is one of the movers that sees new money whenever there is a situation like this - when you get an increase in rates - which is expected by the market," he noted.

During Wednesday's session, the Brazil C bond added 0.249 to 101.687 bid while the bond due 2040 gained 0.70 to 117.85 bid.

In other news out of Brazil, Treasury secretary Joaquim Levy "is preparing the ground to issue real-denominated global bond in 2005," according to an investor note.

Oil prices above $44 a barrel

Oil prices hit above $44 a barrel Wednesday on renewed supply concerns. The threat of a long cold winter in the United States combined with the bankruptcy filing of embattled Yukos helped push oil prices to their highest levels in two weeks.

January crude closed at $44.19 a barrel.

However, according to the sellside source, climbing oil prices have had little overall impact on emerging markets.

"It's not a concern right now. The prices have been going down for the last couple of weeks, but this increase may be just saying that maybe prices are very low and let's just wait to see what happens," he noted.

Oil-producing countries such as Ecuador, Mexico and Venezuela were up. The Ecuador bond due 2030 added 0.35 to 84¾ bid. The Mexico bond due 2009 gained a quarter of a point to 123.10 bid. The Venezuela bond due 2027 was up 0.45 to 104½ bid.

Yukos files for Chapter 11

Russia's embattled oil company Yukos filed for bankruptcy protection in the United States in an effort to stop Russia from auctioning off its most lucrative asset Yuganskneftegas.

Russian authorities plan to sell the subsidiary on Dec. 19 to help pay off a whopping $27 billion in back taxes from 2001.

"The steps we took today were done as a last resort to preserve the rights of our shareholders, employees and customers," said Steven Theede, chief executive office, in a statement.

"Unfortunately, we believe it was the only resort left."

The Yukos story had little impact on Russian paper, said a buyside source.

"Initially it did, but then we were off the lows and it actually closed tighter for the day."

"Everyone is focusing on Dec. 19," added the source.

The Russia bond due 2030 rose 1 3/8 to 103 3/8 bid.

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