Emerging market edges higher in thin trading; rumors of new Brazil sovereign deal

By Reshmi Basu and Paul A. Harris

New York, Aug. 4 - Emerging market bond trading plodded along in light activity Wednesday ahead of Friday's crucial release of non-farm payroll data.

"It's boring on the floors," said a trader. "That's just typical of August."

In primary action, Export-Import Bank of Korea (Kexim) set price guidance for its minimum $300 million sale of five-year notes (A3/A-/A-) in the area of Treasuries plus 110 basis points. The deal is coming to market via UBS, Barclays Capital, and Citigroup.

Market drifts higher

Overall, emerging market debt was up in a light trading session.

The JP Morgan EMBI+ index rose 0.14% during Wednesday's session. Its spread to Treasuries tightened two basis points to 467 basis points.

"The market in general has been very quiet," said Enrique Alvarez, Latin American debt strategist for think tank IDEAglobal.

However, Wednesday's session was not without it bumps. There were some rumors in the morning relating to security concerns that dragged down U.S markets.

"The market suffered some stage fright off of that," said Alvarez.

"Everyone is thinking about non-farm payroll numbers on Friday, security and the price of oil," Alvarez noted.

"We have advanced quite a big deal, but we need some new numbers - some mild numbers for U.S. economic growth - in order to motivate the Treasury market to move prices up and yields lower.

"And that would in turn would give us [in emerging markets] additional support to move higher as far as prices," added Alvarez.

As investors are locked in a wait and see mode, there has been little price action over the last few days.

In Wednesday's trading Brazil, Russia and Turkey were all up. Brazil's component of the EMBI was up 0.10%, Russia was up 0.08%, and Turkey rose 0.30%.

Bulgaria rises on Fitch upgrade

Meanwhile, Bulgaria's paper was up on news that Fitch had raised its long-term foreign currency rating to its lowest investment-grade level of BBB- from BB+. Its component of the EMBI+ index was up 0.22%. Its spread to Treasuries tightened four basis points to 124 basis points.

"The improvement in sovereign creditworthiness is underpinned by Bulgaria's sound fiscal policy and advances on key structural reforms," Fitch said in its release announcing the upgrade.

"Tight budgets, together with progress on privatization (especially the sale of BTC) and solid economic growth, are delivering rapid reductions in the general government debt burden, while liability management such as the July 2004 $679 million Brady bond retirement is helping to smooth future debt redemption profiles."

IMF delay hurts Argentina

However, the International Monetary Fund's decision to delay a $728 million loan payment to Argentina continues to depress its paper, as it now assumed that the government would not be able to carry out its proposed restructuring of nearly $100 billion of defaulted debt.

The country is digging into its international reserves to repay multinational lenders, as it waits for financing from the IMF. The IMF is assessing whether Argentina has engaged in "good faith" negotiations with its creditors.

The Argentina bond due 2008 slid a quarter of a point to 27½ bid in the late afternoon. Its component of the EMBI fell 0.18%. Its spread to Treasuries widened 26 basis points to 5136 basis points.

Rumors of a Brazil issue

Over the last few days there has been a rumor circulating that Brazil will re-open its bond due 2014. A market source said the leads on that deal have denied a re-tap. Now the latest rumor is a new 2018 deal.

"They would definitely be risking it with a new issue but they're realizing that they need to move fast to be able to finish up their 2004 financing requirement," said an emerging market analyst.

"I don't think a Brazil new deal would be the straw that breaks the camel's back and ignites a whole market sell-off, but I do think that any new issuance is going to get mixed reviews, especially when oil prices are threatening the inflation outlook in Brazil," he said

In July, Brazil sold $750 million of 10-year bonds via Deutsche Bank and Morgan Stanley.

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