Emerging market debt sees momentum on tame U.S. PPI; spreads widen in thin trading

By Reshmi Basu and Paul A. Harris

New York, Aug. 15 - Emerging market debt rallied on a dollar basis Tuesday in response to surprisingly tame inflation numbers and a sharp decline in the August homebuilders survey, which fueled hopes that a pause in monetary policy was still in play at the Federal Reserve's upcoming meeting in September.

U.S. core financial markets were bracing for the core producer price index, excluding energy costs and food, to increase by about 0.2%. Instead that number declined by 0.3%.

Those numbers gave credence to the theory that the Federal Reserve can keep inflation in check by slowing growth, fueling a bullish performance across financial markets, according to a market source.

The Dow Jones Industrial Average surged 132.39 points to close out the session at 11,230.26 while the yield on the 10-year U.S. Treasury note fell by seven basis points to end at 4.90%.

As a result, emerging market debt saw higher prices in thin trading. Volumes nudged higher soon after the release of the inflation report but then died down as the session progressed, remarked a trader.

At session's end, the JP Morgan EMBI Global index was up 0.32% while spreads kicked out by six basis points versus Treasuries as the asset class was unable to keep pace with the strong performance in Treasuries.

Overall, the market also saw support as oil prices trickled down, triggered by the easing of political tensions in the Middle East.

Brazil's spreads unchanged

Brazil's external debt generally saw dollar prices rise across its curve, particularly in the long end. Dedicated funds began to purchase the belly of the curve, according to an analyst note. Meanwhile local proprietary desks and fast money were sellers on the long end.

However, spreads for the country were unchanged. During the session, the benchmark Brazilian bond due 2040 was up 0. 65 to 129.95 bid, 130 offered.

Elsewhere, the Argentinean bond discount bond due 2033 gained 1.25 to 97.50 bid, 98.25 offered. The Mexico bond due 2026 added 1.35 to 156.50 bid, 157.50 offered.

Heading into Wednesday's session, investors are expected to square positions ahead of the morning release of the consumer price index. If the numbers exceed market expectations, the asset class will most likely build on Tuesday's momentum.

In other news, Russia's finance ministry paid €1 billion to the Paris Club as part of its plan to prepay the remaining $22.3 billion of Soviet-era debt, making it the largest prepayment ever made to Paris Club creditors.

Under the rescheduling agreements of 1996 and 1999, the debt would have been repaid over the period Aug. 20, 2006 to Aug. 20, 2020.

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