Emerging market debt tightens further; Mexico's Central Bank cuts interest rate

By Reshmi Basu and Paul A. Harris

New York, Jan. 27 - Spreads for emerging market debt continued their tightening trend Friday despite U.S. Treasuries volatility.

The releases of contradictory U.S. economic data sent Treasuries down a rocky road in the early part of Friday's session. Gross domestic product data in the United States showed a measly 1.1% gain for the fourth quarter, sending government bond yields higher. But that news was cancelled out by stronger than expected new homes data. New home sales jumped to 2.9% in December, reported the Commerce Department.

After the morning volatility, Treasuries settled down, giving support to emerging markets, said a sellside source.

"Bonds in Brazil are anywhere from half a point to a full point up," he said.

"Mexico is probably flat to one or two wider, mainly on the back of the Treasury rally. They are not catching up with the rally," he added.

At session's end, Brazil's bond due 2040 was up 0.30 to 130.30 bid, 130.35 offered. Mexico's bond due 2033 lost 0.10 to 117.40 bid, 117.90 offered.

Mexico cuts interest rates

Meanwhile, Mexico's central bank lowered interest rates by half a percentage point on Friday. The move is meant to jumpstart the economy, but the bank also cautioned that it has little maneuvering room to lower rates further.

The rate cut had a positive impact on the peso but triggered profit taking in the domestic equity markets, according to Enrique Alvarez, Latin America debt strategist for IDEAglobal.

The slight uptick in Treasuries propped Mexico's external debt slightly, but nonetheless the country underperformed other credits, said sources.

Treasuries have been defensive in previous sessions, which tends to result in an underperforming Mexico since it has a higher correlation to U.S. government bond moves, Alvarez noted.

While Mexico has been tracking Treasuries, other credits in emerging markets have chosen to ignore it, he added.

In other news, Mexico's election story looks to be improving, noted Alvarez, adding that that was a positive for its bonds.

Polls are showing that leftist Andres Manuel Lopez Obrador is losing popularity.

"And as it slips, the election becomes more undecided," he said.

And undecided is good because it means a potential win by Felipe Calderon, a member of Vicente Fox's party, or Roberto Madrazo of the Institutional Revolutionary Party or PRI.

Those are better outcomes than the uncertainty that Obrador would bring along, he said.

Peru up on Humala popularity slide

Peruvian bonds continued to move up, bolstered by Thursday's poll which showed center-right Lourdes Flores ahead of nationalist Ollanta Humala.

One source said that Peru's debt has reversed it losses in recent sessions, but also warned that it is unclear who will come out ahead in April 9's tight race.

During the session, Peru's bond due 2012 was up ½ a point to 116 bid, 117 offered while the bond due 2033 gained half a point to 118 bid, 119 offered.

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