Emerging market debt up as U.S Treasuries rally; restructuring rumors help Argentina's debt

By Reshmi Basu and Paul A. Harris

New York, Nov. 17 - Emerging markets moved higher as U.S Treasuries rallied after core consumer price index data came in line with expectations.

Inflation jitters crept into the market Tuesday as stronger-than-expected producer price index figures data built expectations that the Fed would accelerate monetary tightening. But those worries were assuaged by Wednesday's release of core CPI numbers.

The consumer price index rose 0.6% in October, above forecasts of 0.4%, while core prices grew 0.2% as expected.

The CPI numbers initially did catch the market off guard, and Treasuries got off to a bumpy start, putting pressure on emerging market debt. But eventually those numbers helped ignite a Treasuries rally, as traders had feared a much higher CPI figure.

The yield on the 10-year U.S Treasury note stood at 4.14% at the end of the session, down from Tuesday's close of 4.21%.

Those gains spilled over into emerging markets.

"It was a very strong day," said the buyside source. "A lot of activity in Brazil."

During Wednesday's session, the Brazil C bond added 0.562 to 100 3/8 bid with its spread tightening six basis points to 431 basis points. The bond due 2040 surged 1.7 to 115.9 bid. Its spread narrowed 12 basis points to 456 basis points.

The Colombia bond due 2009 was up 0.45 to 114.45 bid. The Mexico bond due 2009 gained 0.10 to 122.85 bid. Russia's bond due 2030 was up 0.687 to 101.812 bid. And Venezuela's bond due 2027 was bid at 1041/2, up 0.8.

Meanwhile the Republic of Panama's new bond has proven to be a strong performer in the secondary, according to the buyside source.

On Tuesday, the Republic of Panama sold an upsized $600 million of bonds due 2015 (Ba1/BB) at 99.301 to yield 7.35%, or a spread of 314 basis points more than comparable Treasuries via Morgan Stanley.

"It's trading very well, which is expected - considering that it was oversubscribed and a small deal.

"I think it will continue to trade well. It's trading at par," added the buyside source.

Argentina up on rumors

Paper from Argentina also made gains in trading Wednesday.

"Argentina had a very good day on a rumor that the exchange may happen this Friday," said the buyside source.

"I think the reason why the market is trading up is because people are expecting the government to improve the offer."

The Argentina bond due 2009 was up ¾ of a point to 33½ bid.

Argentina paper received another boost from a court decision late Tuesday.

Investors had been paying close attention as to whether New York Federal Judge Thomas Griese would rule in favor of a request by a German businessman to block the country's restructuring over $100 billion in defaulted debt in a class action lawsuit. The judge ruled that he would not halt the process.

More good news for Brazil

More good news came out of Brazil. The country's retail sales in September were 8.87% higher than a year earlier in inflation-adjusted terms, according to the Brazilian Census Bureau.

That marks the tenth consecutive month of year-on-year increases, according to a market source.

In the first nine months of the year, retail sales increased 9.32% compared with the same period last year. Over the 12 months to September, sales rose 6.72%.

Leading the way were furniture and home appliances, up 20.32%.

Late Wednesday, Brazil's Central Bank raised its benchmark lending rate to 17¼% in a move intended to curb inflation. This is the third hike since September.

Tuesday's Asian market close

Spreads were firm at the close of Tuesday's session in Asia, according to a market source. Buying was active in high yield paper.

Spreads for Korea's bond due 2008 were unchanged at Treasuries plus 15 basis points.

Korea Development Bank tightened three basis points to Treasuries plus 58 basis points.

India's Export Import Bank narrowed five basis points to Treasuries plus 120 basis points.

But Philippines debt was down on news that the government would issue new paper next year.

The Philippines bond due 2025 was bid at 104.38 from Tuesday's 104.94 bid.

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