Emerging market debt rises in thin trading; Brazil 2040 pierces another new high

By Reshmi Basu and Paul A. Harris

New York, Dec. 22 - Emerging market debt saw another positive session Thursday amid low volumes. Moreover, the Brazilian bond due 2040 yet again settled at a record dollar high.

Trading has already thinned out due to the holiday break. Additionally, the New York City transit strike further reduced already skeletal trading desks.

"It's taken liquidity away, even though liquidity is very limited this time of the year," remarked Enrique Alvarez, Latin America debt strategist at think tank IDEAglobal.

Meanwhile, the asset class overall tracked U.S. Treasuries, which saw their curve flatten even more in response to Thursday's inflation data.

The personal consumption expenditures index measure of inflation fell by 0.4% in November. However, the Fed's favorite inflation gage, the PCE index, which excludes food and energy, inched up by 0.1%, coming in lower than expectations.

Good news on the inflation front ignited gains in Treasuries. The yield on the 10-year note stood at 4.43%, down from Wednesday's close of 4.50%. The yield on the 30-year bond came in to 4.62% from Wednesday's 4.68%.

"You saw Argentina bounce back pretty interestingly," noted Alvarez.

"Brazil is where the activity has been for the most part," he added.

During the session, Brazil's 2040 bond added 0.65 to 128.70 bid, 128.90 offered.

Alvarez said he believes that Brazil's gains stem from its announcements that it will repay the International Monetary Fund and pay off the remaining $2.6 billion it owes to the Paris Club.

"It's moving away from all the multilaterals. It's got an economic program that it has stuck to. It's got a lot of monetary discipline involved."

Furthermore, the assumption for 2006 is that whoever wins the presidential election the country's fiscal policies will still stay intact.

And by doing so, Brazil will likely see a second ratings upgrade in 2006, something that investors are banking on, remarked Alvarez.

EM bond flows post record high in '05

Emerging market bond funds saw another banner year in 2005, according to EmergingPortfolio.com Fund Research.

With one week left until the new year, dedicated investors have poured in a record $9.5 billion to these funds during 2005, nearly tripling 2004's number of net $3.2 billion.

According to the company's data, the leading recipient of flows was the $2.1 billion Pimco Emerging Markets Bond Fund, which gathered more than $800 million of net inflows during the year while the $3.3 billion Ashmore Emerging Markets Liquid Investment Portfolio saw net inflows of $608 million.

January recorded a monthly inflow record of $1.3 billion. But as inflationary concerns grew, flows moderated at mid-year.

Inflows returned at full force in the fall but finished the year at a virtual standstill, the research firm said in a news release.

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