Emerging market debt spreads tighten as Brazilian noise quiets; oil producers marginally up

By Reshmi Basu and Paul A. Harris

New York, Aug. 2 - Emerging market debt prices moved higher Tuesday as the search for yield continues to whet investor's appetite for risk. Meanwhile, Brazilian paper rose as congressional testimony by a key figure in the kickback scandal implicated no one.

"EM is outperforming Treasuries," said a trader. "People want yield."

Even as U.S. Treasuries ratcheted up losses, emerging market debt prices moved up, with spreads tightening five basis points across Latin America. The exception was Argentina, which is starting to show slight weakness, added the source.

Spreads on Brazilian bonds compressed for the third straight day, according to a market source.

The source added there was two-way activity on the long end.

During the session, the Brazil bond due 2040 added 0.45 to 117.70 bid.

"The market continues to build very slight momentum towards the upside," according to Enrique Alvarez, Latin America debt strategist for IDEAglobal.

He added that trade in the asset class has divorced itself from the performance of the Treasury market, driven primarily by the lower volume of political noise from Brazil.

"You have more ease coming into the market about the Brazilian political story. Today [Tuesday] was a big day," remarked Alvarez, referring to Tuesday's testimony by a key player in the Workers' Party.

Former cabinet chief Jose Dirceu denied allegations of bribery and corruption charges in front of a congressional committee. He is accused of masterminding the bribes for votes scheme.

Political pressure forced him to resign as cabinet chief on June 16. But he returned as a lawmaker.

"He's not going to resign his position as congressman," said Alvarez, who added that such as resignation might have hinted at president Luiz Inacio Lula's involvement in the scandal.

"And he's really not admitting to anything."

His testimony took some edge off the market's nervousness, given that no key government members were implicated, said sources.

Also in trading, the Colombia bond due 2012 added 0.05 to 114¾ bid while the bond due 2020 gained ¾ of a point to 130¼ bid. The Russia bond due 2030 packed in 0.124 to 110.687 bid. And the Turkish bond due 2030 moved up 1/8 of a point to 141¾ bid.

The market source added that the market has already entered into a wait and see mode as it awaits Friday's nonfarm payroll numbers in the United States.

Search for yield

Additionally, sources added that the market is gaining support from investor's on-going search for yield.

"Overall, people are looking ahead and saying that the Fed is going to continue with 25 basis points hikes," remarked Alvarez.

"That's pretty much what the market will price in. It will do this slowly, and therefore we need to continue looking for yields. And the place to be is Latin America," he added.

Oil's marginal impact

Ecuadorian and Venezuelan paper treaded higher as oil prices increased Tuesday. Light sweet crude for September delivery closed at $61.89 per barrel, up 32 cents.

"Oil continues to be a sort of quiet non-influential factor for our market," noted Alvarez.

He said that if oil was to make at stab at $62.50 or higher, Latin American debt may be impacted via the pressure felt by the U.S. equities market.

"As far as the present movement is concerned, it seems to be contained to its own market place. There's no contagion coming from oil into the U.S equities," he added.

He remarked that the effects of higher oil prices in Ecuador and Venezuela have been marginal, given that the search for yield is the primary driver for Ecuador's upswing.

Also he added that investors are "becoming accustomed or accepting the way that [finance minister Rafael] Correa is looking for financing, which is possibly taking some money from Venezuela and essentially going at it on his own and moving away from the World Bank or anything else to do with the multilaterals."

During trading, the Ecuador bond due 2012 added 0.55 to 99.80 bid while the bond due 2030 lost 0.20 to 87.20 bid. The Venezuela bond due 2027 gained 0.15 to 105.05 bid.

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