Emerging market debt ticks lower in illiquid market; EM funds lose $141 million

By Reshmi Basu

New York, Nov. 3 - Emerging market debt ticked lower Thursday during an illiquid session, as U.S. Treasuries slid a day ahead of the release of U.S. non-farm payroll numbers.

In other news, emerging market bond funds saw outflows for the second straight week, according to EmergingPortfolio.com Fund Research. Funds lost $141 million for the week ending Nov. 2. They dropped 0.37% on a performance basis for the week.

Last week, the market saw a modest $26.3 million leave the market.

EM drifts down

Emerging markets saw a relatively quiet session as it took its cue from Treasuries, according to a market source. However, higher Treasury yields did put pressure on the asset class. In late trading, the yield on the 10-year note stood at 4.65% from Wednesday's close of 4.61%.

It was "a slow erosion in the market," according to Enrique Alvarez, Latin America debt strategist for IDEAglobal, who added that higher beta credits such as Brazil and Ecuador underperformed the overall market.

Late in the day, the Brazil bond due 2040 was spotted down 0.60 to 119½ bid. The Ecuador bond due 2030 was quoted at 89 bid, down three-quarters of a point.

"Overall, volumes have been very meager. There hasn't been a lot changing hands," Alvarez added.

Elsewhere, JP Morgan reduced its recommended exposure for Mexico in its model portfolio to underweight from neutral, citing poor economic growth and increased political uncertainty ahead of next year's presidential elections.

Alvarez said the election uncertainty has not sparked a sell-off in the credit. Instead the market is focused on Treasuries.

During the session, Mexico outperformed the JP Morgan EMBI+ Index, which was down 0.36%. Mexico's component of the index was down 0.25%.

Mexico has a much higher correlation to 10-year Treasuries, said Alvarez, adding that in the grand scheme of things, Treasuries have not moved that much.

"We're still overpriced. So it's fairly easy for the market to come off these levels, even if Treasuries remain the same."

Holding pattern

The market has been in a holding pattern, given that this week has been punctuated by the release of U.S. economic data and Thursday's testimony by Federal Reserve chairman Alan Greenspan.

The session saw the release of the ISM non-manufacturing index, which increased to 60% in October from 53.3% in September. The number came higher than market consensus of an expected 56.9% increase.

In his testimony to Congress' Joint Economic Committee, Greenspan remained optimistic about U.S. growth, despite the hurricanes that ravaged the Gulf Coast. Moreover he did warn of inflationary pressure.

Next up is Friday's release of non-farm payroll numbers.

Nonetheless, the market will remain in a virtual standstill even into next week, according to a sellside source.

"We won't have some color until next week in terms of new issue/new supply," he said.

He added that investors are waiting to see how Treasuries would react to the economic releases, especially positive data such as Thursday's ISM release.

Evraz sells $750 million bonds

In the primary market, Russian steel company Evraz Group SA priced $750 million of 10-year fixed rate notes (B2/B+/BB-) at 98.338 to yield 8½% via ING and UBS Investment Bank.

Nonetheless, the sellside source noted that issuers in the primary market have been Asian-centric. And on top of that, those credits have been of the exotic variety.

"We've been seeing a lot of names out of Asia, which are really strange names that no one has seen before. Apparently they have been well traded," he added.

"From that side of the world, everything is fine," he noted.

Meanwhile, Latin American issuers will have to sit it out, waiting for stability and the return of liquidity to the asset class.

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