Emerging market debt higher on U.S. economic data

By Reshmi Basu and Paul A. Harris

New York, May 26 - Emerging market debt scored gains for the second straight session on Friday, marking the close of a volatile week.

As expected, trading volumes eased up ahead of the holiday weekend in the United States. Nonetheless, a trader observed that bonds were "better bid," following the release of the U.S. personal income and consumption index for April, which matched Wall Street expectations. The data helped build the case for the Federal Reserve to halt its current monetary tightening campaign at its June meeting.

But the trader added that the next piece of economic data could produce the opposite effect, as jitters over Fed policy remain high. He observed that he market is divided as to how the Fed will proceed.

"The [performance of the] market is day-by-day," he added.

"Up until the Fed meeting, data will drive the market."

During the session, the Brazilian bond due 2040 added 0.45 to 123.35 bid, 123.60 offered.

The Philippines bond due 2025 was up by 0.75 to 126 bid, 126.50 offered. And the Venezuelan bond due 2027 rose one point to 121.45 bid, 122.25 offered.

Meanwhile Colombian bonds gained as the market prices in an uneventful re-election win by president Alvaro Uribe on Sunday.

At session's end, the country's bond due 2012 was up 0.60 to 115.30 bid, 115.70 offered and the bond due 2027 surged three points to 107 bid, 109 offered. The bond due 2033 was higher by 1.25 to 131 bid, 132 offered.

More volatility expected

Even though overall trading has stabilized for now, market sources predicted that more volatility lies ahead. One source noted that investors' position trimming is still under way in local rates and equities, which will put stress on currencies. The latest round of currency volatility has spooked EM investors, noted sources.

Emerging market external debt has lagged the sell-off in currencies, given investors' lighter positions and positive technicals.

"But the correction in currencies is healthy," remarked a buyside source.

"And for the last few days, they have been recovering, which has helped EM."

Severstal up in secondary

Over to Russia, steelmaker Severstal's issues could see higher than normal levels of trading activity when the market returns Tuesday on the back of the announcement that Arcelor has agreed to purchase the majority stake in Severstal in a $13.1 billion deal, according to a market source.

Alexey Mordashov, Severstal's controlling shareholder, will receive a 32.2% stake in Arcelor in exchange for an 89.6% stake in Severstal, some other related assets and €1.25 billion in cash.

In the secondary market, the company saw a surge in bond prices, according to another trader.

The Severstal 8 5/8% bond due 2009 was quoted at 104.25 bid, 105 offered, up two points while its 9¼% bond due 2014 was spotted at 111.50 bid, 112.50 offered, up five points.

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