Emerging market debt higher on equities bounce back; high yielding Latin American credits tighten

By Reshmi Basu and Paul A. Harris

New York, Jan. 19 - Emerging market debt rode higher Thursday, propelled by a rebound in the U.S. equities market. High yielding Latin American credits led the way.

The Dow Jones Industrial Average reversed a four-day losing session on the back of solid earning reports from Pfizer Inc and Advanced Micro Devices Inc. The Dow Jones moved up 25 points to 10,880 at session's end, erasing earlier gains as oil prices pierced $67 per barrel.

That upturn in equities coupled with short covering helped push sovereign bonds higher, said a trader.

The JP Morgan EMBI Global Diversified rose 0.27% while its spread over Treasuries narrowed by seven basis points.

Argentina, Ecuador, Uruguay and Venezuela saw their spreads tighten by double digits. Spreads for Peru tightened by 14 basis points.

Meanwhile Brazilian bonds gained momentum on the central bank's decision to cut the Selic rate to 17¼% from 18% late Wednesday.

Brazilian corporate names were up only marginally on the day, according to an analyst, who added that sovereigns were up a point.

During the session, the Brazilian bond due 2040 added 0.90 to 130¾ bid, 130.85 offered.

Elsewhere, the Colombian bond due 2014 gained 0.30 to 114½ bid, 114.90 offered. The Venezuelan bond due 2027 moved up by 0.80 to 123.40 bid, 123.90 offered.

EM flows stand at $297.7 million

In other news, inflows into emerging market bond funds stood at $297.7 million for the week ending Jan. 18, according to EmergingPortfolio.com Fund Research. Year-to-date inflows stand at $797.8 million.

Positive flows into the asset class have been credited with helping the market weather the recent meltdown in equities, according to sources.

"It's been a strange early year, what with the volatility in Japan and stuff," remarked a debt strategist, who added that net-to-net, flows indeed have kept the market immune from such twists.

"Treasury bonds have done well in major markets. Most bonds have seen significant rallies...that's consistent with net new capital," he added.

Furthermore, the story on the Street is that new dedicated mandates are being put to work. In fact, one mandate may have surfaced on Thursday, according to the strategist.

"I say the market feels inclined to buy dips rather than to sell peaks," he said.

He added that technically the market feels "okay" but there are concerns.

"We're still trying to evaluate how much Fed tightening we are going to get, whether it implies too much inversion with the current structure of bond market spreads. So we're looking at a potential sell-off in high quality bond markets."

The strategist is also concerned over geopolitical risk, particularly in Iran as it impacts oil prices.

During Thursday's session, oil topped $67 per barrel on fears that supply would be hampered by a potential standoff between the United Nations and Iran over the resumption of its nuclear research program.

According to another source, oil prices were also pushed up by a purported terror threat from Osama Bin Laden.

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