Emerging market debt tightens, ignores economic data; funds see $138.89 million of inflows

By Reshmi Basu and Paul Deckelman

New York, March 15 - Emerging market debt was steady Thursday despite volatility in the U.S. financial markets in reaction to disappointing U.S. economic numbers. For the session, the debt market traded in step with U.S. equities, which chose to shrug off data that suggested a slowdown in economic growth as well as a spike in inflation.

In other news, emerging market dedicated funds saw $138.89 million enter the category for the week ending March 14, reported Emerging Portfolio.com Fund Research.

Since the prolonged sell-off that took place a few weeks ago, the asset class has been trading with a firmer tone but trading volumes have yet to catch up to pre-turbulence levels.

Nonetheless, the market rebounded after last week's heavy sell-off in which the category saw $555.30 million exit, the first time this year EM funds recorded outflows.

EM firmer, shrugs off data

Ahead of a busy release of U.S. data, the Asian trading session Thursday was firmer on the back of stronger performances from regional equity markets. Nonetheless, a market source noted that trading activity remained thin.

On the high-grade side, corporates outperformed sovereigns. Within the Indian banking names, credit derivative swaps outperformed cash, in part due to the CDO printing in Indian names.

On the sovereign front, both Indonesia and the Philippines added 1/8 to 3/8 point on each of their curves.

By the time New York rolled around, the market was on tippy-toes ahead of key economic releases, which pointed to a slowdown in economic growth and a rise in inflation.

The producer price index surprisingly surged 1.3% in February, coming in much higher than the market consensus of 0.6%. Excluding food and energy, the PPI increased 0.4%, double the expected 0.2%.

Adding reinforcement to the U.S. economic slowdown camp, the New York Fed and the Philadelphia Fed each reported a decline in their regional activity indices.

In response to the numbers, emerging market trading was volatile, tracking the shaky performance by U.S. stocks, according to a market source.

But eventually U.S. stocks shrugged off the data, churning out a positive session as the Dow Jones Industrial Average index rose 26.28 points to finish at 12,159.68.

That positive performance gave support to emerging markets, which saw spreads on the JP Morgan EMBI+ index tighten by 2 basis points to 183 basis points over U.S. Treasuries.

Among benchmark names, the Brazilian bellwether bond due 2040 was unchanged at 133.85. The Russian bond due 2030 gave up 0.06 to 113.38 bid. And the Turkish bond due 2030 added 0.50 to 152.81.

Meanwhile Vietnam benefited as Moody's Rating Services revised its rating outlook to positive from stable.

During the session, the Vietnam bond due 2016 added 0.25 to 106.50 bid, 107.50 offered.

Latin America steady

A trader in Latin American issues said he saw "a very quiet day today [Thursday], with spreads a little tighter, but nothing of great substance really" happening.

He added that he saw nothing standing out, with "everything between 3 bps [wider] and minus 3 bps, pretty much across the board."

Emerging issues were said to have pretty much shrugged off lingering concerns about the problems of the subprime lending industry in the United States, seeming to take a cue from Wall Street, which moved cautiously higher Thursday for a second straight day.

Yields were seen having come in slightly on Brazil's 7 7/8% global notes due 2015, whose price edged up to 112.85, and on some of the other long Brazilian debt, including the 10¼% bonds due 2013, which ended at 122.63, its 8¾% notes due 2025, closing at 126.63, and its 7 1/8% 30-year long bond, which finished at 109. Prices eased slightly at the short end of the curve.

Mexico's 6 5/8% global bonds due 2015 also inched up to 107.86.

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