Emerging market debt inches higher; inflows at $43.5 million; Banco Votorantim to issue

By Reshmi Basu and Paul A. Harris

New York, Aug. 19 - Emerging market debt drifted slightly higher in trading Thursday but soaring oil prices lifted Mexico's paper.

Early Thursday morning, there was two-way flow in the market but by the afternoon profit-taking hit the trading floors.

"Trading was active in the morning and quiet in the afternoon," said a trader.

"The market was well bid in the morning. We had both buyers and sellers.

"And then mostly sellers," he added.

The market gave in to profit-taking after scoring gains in the last few weeks.

"It's had a nice run. I think it's more of a consolidation before it moves higher," noted the trader.

Meanwhile, oil remained a headline story in trading Thursday. Prices soared above $48 per barrel on fears that more violent clashes in southern Iraq between U.S. troops and fighters loyal to Shiite Muslim cleric Moqtada al-Sadr will curb oil production.

"It helps Mexico's spreads to continue to come in," said the trader.

Mexico's bond due 2026 added 0.30 to 147½ bid.

Meanwhile political drama held back Venezuelan paper.

"Venezuela has too many issues. Eventually it will make a play. But today [Thursday], it hasn't," he added.

Opposition leaders said they would not participate in an audit of last Sunday's recall referendum to oust President Hugo Chavez, contending that hundreds of voting machines had been tampered with.

The monitor group from the Organization of American States has rejected the opposition's demand that voting machines be reviewed and tested.

The audit started Thursday, with the results expected this weekend.

Venezuela's bond due 2027 was unchanged at 91½ bid.

Overall, the JP Morgan EMBI+ Index rose 0.04%. Its spread to Treasuries widened one basis point to 448 basis points during Thursday's session.

Inflows at $43.5 million

Emerging market bond funds drew in $43.5 million, making it their second consecutive week of inflows, according to EmergingPortfolio.com Fund Research, which tracks 200 emerging market bond funds with total assets of $16.5 billion. Year to date inflows are now $311.2 million.

Global bond funds raked in $144.9 million for the week ending Aug. 11. Year to date inflows are $2.89 billion. EmergingPortfolio.com tracks 260 global bond funds with$79.2 billion of total assets.

Paper range-bound

Looking ahead, the rally may be grinding down as emerging market paper becomes less cheap, one source suggested.

"I don't see anything happening in our world. We will probably just stay range bound," said a buy-side source.

Presently the EMBI+ is at a spread of around 450 basis points. In January, the index hovered in the low 400s.

"What's the upside from here? In the best case, it would reach those tight levels and then what?

"It's kind of unsustainable," noted the source.

But he still acknowledged that the market has a little bit more steam left.

"It definitely hurts to not be invested but there's got to be a point when people again are going to look at this and say 'this is too expensive.'"

But when that point comes, the external environment will be different.

"I think you gain more by being invested than not being invested," noted the source.

"Spreads came in and we made up for pretty much all the sell off in April and May. We are almost catching up with high yield year to date."

Carry trade still on

For the time being, the carry trade is alive and well, according to the buy-side source.

"We need an external event to take us out of it. But for now, everyone agrees that Treasuries have pretty low yields.

"If you are looking for something with a little pick up, EM is the place to be," noted the source.

"And I think a lot of people have returned to the asset class.

Lula's high court victory

In Brazil, the Supreme Court ruled 7-4 in favor of an 11% tax on pensions of government retirees, a victory for President Luiz Inacio Lula da Silva's government.

The Brazil C Bond was up 0.125 to 96.625 bid while the bond due 2040 was down quarter of a point to 103¾ bid.

"Surprised it hadn't rallied more," commented the buy-side source.

Investors had seen this legal battle as a way to gage how much political support the government has.

"On the other hand, had the government been defeated, I don't think it would have been such a big negative.

"You win some battle, lose others," noted the source.

Two corporates add to pipeline

In primary action, Sao-Paulo, Brazil-based Banco Votorantim SA (issuer rating B1/B+) plans to issue a $100 million three-year bond in September via its Nassau branch.

Price talk is 5 1/8% to 5 3/8% on the bond, which is expected to mature in September 2007.

Banco Itau BBA SA is the lead manager for the Regulation S bond offering.

And Jakarta-based steel manufacturer PT Krakatau is considering a $400 million bond offering in 2004.

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