Emerging market debt drifts lower; Mexico hurt by political noise

By Reshmi Basu and Paul A. Harris

New York, April 4 - Emerging market debt suffered another day of losses in thin trading Monday, as Venezuela announced a potential issue targeted towards the local market.

The Republic of Venezuela plans to sell at least $1 billion of 20-year eurobonds (B2/B/B+) at 7.65% to 8.10%. Investors will pay in bolivars at an exchange rate of 2,150 per dollar.

A market source said that local demand for dollars would help build up the books, otherwise "Venezuela would have to pay more given the spread widening in the market if they targeted U.S. investors"

Citigroup and JP Morgan are running the Regulation S deal.

EM drifts lower

Generally during Monday's session, prices were was lower as both inflationary concerns and the spike in oil prices continued to plague the market.

The Brazilian bond due 2040 touched as low as 109¾ bid but ended the session at 111.10 bid, up 0.35 on late local buying. The Venezuela bond due 2027 dropped 0.15 to 98.60 bid. The Russia bond due 2030 fell 0.63 to 102.12 bid. The Colombia bond due 2006 fell 2½ points to 104 bid.

"The market continues to look weak," said Enrique Alvarez, Latin America debt strategist for think tank IDEAglobal. He added that high beta paper came under more pressure.

"And I think the point here is that crude oil is making a lot of noise," he said.

In trading, crude oil prices hit as high as $58.28, before pulling back to $57.01 at the close of the session.

"I think overall Latin America is worried about the health of the U.S. economy based on crude oil prices and also on inflation levels," said Alvarez.

"Also, I think that's why you see a little more apprehension on taking Latin American risk."

In the long term, high oil prices pose risks to the overall strength of the U.S. economy because more people become wary about investing ahead of a slowdown, remarked Alvarez. He added that inflationary pressure from the oil spike was also casting a shadow.

"This is something that has been repeated and said for a long time. It hasn't produced very large headline numbers, but still it's a concern for everyone that such heavy crude oil prices will filter into the economy and you will some reflection on the consumer side," he added.

More inflationary pressure will translate into a more aggressive Federal Reserve, he said.

"Higher interest rates overall in the U.S. means less attraction to go into higher risk camps such as emerging markets," remarked Alvarez.

Mexico down on political concerns

Alvarez said that Mexico took a sizable hit on Monday, which is unusual given how closely the sovereign correlates to U.S. Treasuries. But political concerns are bringing down its paper.

Mexico City's mayor Andres Manuel Lopez Obrador lost a vote on Friday, potentially ending his presidential bid in 2006. A legislative committee recommended that the popular leftist mayor should be stripped of his immunity from criminal prosecution so that he can face charges that he ignored a court order to stop construction of a hospital access road on private land.

During trading, the Mexico bond due 2009 lost a point to 117¼ bid.

Alvarez spotted the bond due 2026 at 149¾ bid, 151¼ offered, down a point on the bid side.

The spread on Mexico's component of the JP Morgan EMBI+ widened by seven basis points to 189 basis points, which Alvarez called a "heavy" move.

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