Emerging market spreads narrow in subdued trading; Ukraine down on election crisis

By Reshmi Basu and Paul A. Harris

New York, Nov. 23 - Emerging market spreads tightened Tuesday in thin trading but paper from Ukraine sank on continued election turmoil.

With two prime ministerial candidates claiming victory, paper from the Ukraine fell as mass demonstrations spilt into the streets for a second straight day.

Interfax reported that opposition leader Viktor Yushchenko took a symbolic presidential oath of office in Ukraine's parliament chamber Tuesday, defiantly claiming power as tens of thousands of his supporters massed outside, according to a market source. Yushchenko approached the podium and took the oath after a special parliamentary session had officially ended.

"This is beginning to develop into a very dangerous situation," the source added.

According to Sunday's official run-off results, prime minister Viktor Yanukovych was hailed the winner, although exit polls showed Yushchenko as the victor.

Ukraine's paper continued to slide. The bond due 2011 was bid at 100.3125, 101.3125 offered, down ½ a point. Its bond due 2013 was bid at 102.9375, 103 7/8 offered, down 3/8. The 10% bond due 2007 fell 0.156 bid to 106.8125, 107.6875 offered. The 11% bond due 2007 was bid at 107.25 and offered at 107.9375, down 0.53125

Spreads tighten despite Treasury volatility

But overall spreads for emerging market paper narrowed in thin trading Tuesday ahead of the U.S Thanksgiving holiday.

The JP Morgan EMBI+ Index was up 0.06%. Its spread to Treasuries tightened four basis points to 379 basis points.

"It [trading] was busy, then quiet, then busy," said a trader. "In general, things have been tighter. The Treasury market has been all over the place," he said.

"The [EM] market fell on Friday and no one really sold. People are generally better buyers and it's forced things higher."

During a seesaw session, U.S Treasury prices fell in response to higher oil prices at the market close. Oil climbed as high as $50.25 per barrel, before landing at $48.94.

The yield on the 10-year Treasury note stood at 4.19% from 4.18% at Monday's close.

The trader added that the emerging markets sector is awaiting Brazil's local-currency denominated issue, which is rumored to be coming at any time.

Brazil up, despite higher inflation

Brazilian paper aimed higher Tuesday. The C bond added 0.06 to 100.31 bid while the bond due 2040 gained 0.30 to 115.45 bid.

The market chose to ignore higher-than-expected inflation reports in Brazil, as its paper pushed higher across the curve, according to a Latin America debt strategist for Refco EM.

The country's inflation grew at 0.63% in November, up from 0.44% in October.

"What is building up is probably another action by the monetary authorities in the next meeting by 25 to 50 basis points," he said.

Meanwhile there was good news elsewhere in Latin America.

"The Chilean market is reporting excellent numbers in terms of growth. They reported a 6.80% increase during the third quarter, mostly on the back of higher exports and higher prices of those exports related to copper.

"I think overall the market is moving on domestic issues."

The meeting between Colombian president Alvaro Uribe and U.S. president George Bush is also moving Colombian paper higher.

"President Bush pledged to support his [Uribe's] policies both politically and economically.

"Overall, local news seems to be supporting higher prices," he said.

"That's what we've seen, it [Latin American debt] keeps on going up."

Worries about weak dollar

The U.S dollar fell to another low Tuesday against the euro, which rose above $1.31. The question weighing on investors minds is at what point will emerging market debt feel the pinch.

"That's one of the great wild cards in EM right now," said an emerging market analyst.

"In theory, the weak dollar should be pushing U.S treasury yields up as traders bet that a weak dollar means imported inflation, which should lead to higher fed funds rates. But in practice, the weak dollar hasn't had much of an impact on U.S interest rates, at least not yet.

"So until the UST market begins to react to the weak dollar, EM investors will remain bullish - all eyes are still on U.S interest rates, and U.S rates aren't reacting," he said.

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