Emerging market debt drifts lower as Treasuries drop; Venezuela and Brazil ride higher

By Reshmi Basu and Paul A. Harris

New York, Nov. 30 - Emerging market debt prices edged lower as U.S Treasuries suffered through another tough session.

For the second straight day, U.S Treasury yields reached a four-month high. Contributing to the drop Tuesday was economic data, which pointed to a healthier U.S. economy. The Chicago purchasing management index of business activity remained strong at 62.5% in November. And the second reading of third quarter GDP showed an uptick of 3.9% from the initial estimate of 3.7%.

That data put pressure on the Treasury market. By the close, the yield on the 10-year Treasury note stood at 4.36% from Monday's 4.32%.

However emerging market debt outperformed the U.S Treasury market on Tuesday.

"We traded lower in the morning, tracking Treasuries," said a trader, but added: "EM came back. We actually tightened versus Treasuries. We had a productive day - well bid.

"Venezuela was probably the biggest outperformer on the day. Brazil hung in there."

The JP Morgan EMBI Index fell 0.07% on the day while its spread to Treasuries narrowed three basis points to 377 basis points.

While the U.S Treasuries downturn initiated a downtrade during Monday's and Tuesday's morning session, people still want to play in emerging markets, said the trader.

"People still want the product here. Trading hasn't been too much as this is the year-end for a lot of shops on the street, but it's been a decent day," he added.

Venezuela, Brazil higher

Bucking the broader trend, Venezuelan paper was lifted by high oil prices, according to a Latin America debt strategist at Refco EM. Oil prices briefly hovered above $50 before closing at $49.13.

On Monday, Venezuela's bond due 2034 fell hard on news that the country was reopening its 9 3/8% bond due 2034 (B2/B/B+) to local participants. Local investors can buy the paper in Bolivars in return for dollar-denominated bonds.

But high oil prices erased Monday's loss as the 2034 bond jumped higher. It gained 0.60 on the day to end at 104¼ bid.

Dresdner Kleinwort Wasserstein and ABN Amro are running the retap.

Brazil also continued to perform well, after a rocky start in the morning.

"During the opening of the session, the Brazilian '40s were under pressure," said the strategist. "And then they climbed back to close flat to little higher."

On the macroeconomic front, Brazil reported that its GDP grew by 6.1% in the third quarter. While the numbers came below market expectation, the government heralded it as a sign that the country could maintain sustainable growth.

"That was able to drive the market higher," said the strategist.

The C bond added 3/8 of a point to 100½ bid while the bond due 2040 gained 0.10 to 114.9 bid.

The strategist added that while Latin America has been following the U.S Treasury market for direction, "the spread has not tracked exactly the small correction that the Treasury market is having."

Argentina's restructuring delay

Last week, Argentina formally announced that it was postponing its debt exchange offer to Jan. 17 from Nov. 29. Earlier the Bank of New York, acting as global exchange agent, said the Nov. 29 launch date was not feasible.

Creditors will have until Feb. 25 to swap old debt for up to $41.8 billion in new bonds.

"I think the problem is that nobody - not even the Argentines - really knows whether the restructuring can begin in mid-January," said an emerging market analyst.

"Argentina still needs to find an exchange agent after dumping Bank of New York, and settling on an exchange agent and then having that bank complete all the necessary homework will take time.

"Meanwhile, the Italian securities regulator is dragging its feet with the Argentine proposal, and that could present new opportunities for delay," he said.

It is possible that the restructuring will get off the ground in mid-January, but there is also a very real possibility of another delay, he noted.

"Meanwhile, I don't think there's much, if any, chance of bondholders being able to squeeze a better deal out of the Argentines, at least not until the restructuring is under way. The Argentines will want to wait and see how much participation they'll get before they decide whether to sweeten the deal or not," he added.

Furthermore, the Refco EM strategist added that one of the most important repercussions from the delay be on the talks between the government and the International Monetary Fund at the beginning of 2005.

"The market was also worried about how much money will Argentina need to meet its obligations. The quick calculation is about $5 billion next year. About $1.3 billion are due at the first quarter of the year.

"But with the recent performance of the export market and surplus on the balance of trade and the level of reserves, they are going to have the money to meet that deadline.

"Going forward for the rest of the year, that's uncertain.

"The government needs to place a program with the IMF to be able to roll over the debt."

In trading Tuesday, the Argentina bond due 2008 slipped 0.20 to 31.80 bid while the bond due 2009 added 0.30 to 33.050 bid.

Finally, Latin American corporate trading was steady during Tuesday's early morning session. There were a few exceptions.

Mexican glassmaker Vitro SA de CV bond due 2013 gained ½ a point to 97 bid, 98 offered.

Communications company Grupo Iusacell SA de CV's bond due 2006 added five points to 33 bid, 35 offered.

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