Emerging market debt up in quiet trading; funds see $310 million inflows; Argentina angers creditors

By Reshmi Basu and Paul A. Harris

New York, Feb. 3 - Emerging market debt moved higher in an overall quiet session, while Argentina added salt to creditors' wounds with its attempt to pass a law that would prevent it from sweetening its debt swap proposal.

Overall, prices rose Thursday as investors awaited Friday's U.S. non-farm payroll numbers.

In late trading, the Brazil C bond was spotted at 102.31 bid, up 0.31. The bond due 2040 was seen up ¾ point at 115.55 bid.

The Ecuador bond due 2030 was quoted at 94 bid, up 0.95. The Russia bond due 2030 was spotted at 105.43 bid, up 0.68

"It was a quiet day," said a buyside source. "We ended up a little bit tighter here and there."

Investors are fairly neutral, as this week's Federal Open Market Committee meeting did little to change the monetary picture, noted the source. On Wednesday, the FOMC raised its federal funds target rate for the sixth straight time by 25 basis points. The market viewed the move as a non-event.

Many have placed importance on Friday's non-farm payroll numbers because of the potential volatility it may cause in the U.S. Treasury market. But the buyside source cautioned that the number offers little clue into the direction of the market.

"It's going to be a mixed series of data from now until the second half of the year. It would be a mistake to read too much into it," noted the source.

Inflows at $310 million

Emerging market bond funds had inflows of $310 million in the week ending Feb.2, according to EmergingPortfolio.com Fund Research.

This is the best week since Dec. 22, 2004.

This year has started with five straight weeks of inflows, in which a total of $1.1 billion has entered the market. The previous week had inflows of $113 million.

Global bond funds had inflows of $597 million in the week. These funds have had $1.79 billion of inflows year-to-date.

Argentina upsets creditors again

Meanwhile creditors were angered by developments in Argentina, where they see the country as trying to dodge the bullet by enacting a law which would prevent the current government as well as future administrations from improving its debt offer.

The government said late Wednesday that it would ask Congress to push through a law that would stop any future negotiations with bondholders who do not participate in its $102.6 billion debt swap ending Feb. 25. President Nestor Kirchner sent the bill to congress Thursday morning, where it was subsequently passed.

The bill will next go to the lower house.

"The information that we are getting is that they are trying to hardball investors one last time before the deadline is due," said a source.

Another rumor floating around is that the government is trying to extend the date of the exchange. Friday is the first deadline in which "it is first come, first serve," said the source.

"The market was pretty much spooked by the news on Congress. It's definitely not positive news," said a Latin America debt strategist at Refco EM.

"We are seeing a lot of flow from retail accounts. And then hedge funds are buying. It seems like retail investors were capitulating and hedge funds are ready to jump on the opportunity," he noted.

Historically, countries that have done this type of restructuring tend to perform well after the completion of the exchange, said the strategist.

"If you have a security that is highly discounted, if there is some positive movement, you will see those over-performing in the market."

In addition, Standard & Poor's on Wednesday said it expects to raise Argentina's foreign debt to B- from selective default, following the completion of the debt exchange.

"It took Ecuador almost three to four years to obtain an upgrade from S&P. It's positive news from S&P and negative news from Congress," he remarked.

During Thursday's session, the Argentina bond due 2008 was up 0.15 to 30.90.

"Every time, you look at it, it's somewhere in the 30s," said the buyside source.

"It seems like a high 31/32 - that prices in a very optimistic scenario. And I don't see a lot of value there. It goes up and down, probably on people reassessing whether they have to buy it based on whether it is going to be in the index or not."

Brazil's real keeps charging ahead

In Brazil, despite the government's attempts to curb the appreciating real, it closed Thursday at R$ 2.603 to the dollar, which fell 0.46%.

"The government is trying to put a stop on the appreciation of the real. And so far, they have not been successful," said the strategist.

"There was some news that some locals were short in the reais and the central bank was buying dollars," he said.

The Central Bank bought $100 million at R$ 2.605. Additionally, local bank Uniao de Bancos Brasileiros SA (Unibanco) sold $125 million equivalent of bonds linked to the Brazilian currency via Citigroup. The deal was in high demand, he said.

"It is a trade that has worked out extremely well this year. You go into local markets and you take advantage of the high interest rates."

This allows investors to take advantage of the appreciation of the real.

"You are seeing smart money doing this. The retail and the small investors now have the option to this up to a certain extent with this type of bonds.

"They are euroclearable and they are dollar-denominated."

Looking ahead, more of these types of deals are in the future, he remarked.

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