Emerging market debt flat ahead of FOMC meeting; India's Vedanta prices

By Reshmi Basu and Paul A. Harris

New York, Dec. 10 - Spreads for emerging market debt tightened Friday even though liquidity looks to be drying up for the remainder of the year.

"Really slow day," said a trader. "Little volume."

"No one is going to shift positions before the Fed meeting."

The Federal Open Market Committee will meet on Tuesday, where it is expected to raise interest rates - and continue to do so in the next year.

In muted trading, the JP Morgan EMBI+ rose 0.01%. Its spread to Treasuries narrowed one basis point to 378 basis points.

The Brazil C bond added 0.062 to 101¼ bid while the 11% bond due 2040 gained a quarter of a point to 115.96 bid. The Russian step bond due 2030 slipped 0.32 to 101.68 bid. The Venezuela bond due 2027 slid 0.40 to 102.85 bid.

Meanwhile, surprising news came out of Mexico. The central bank hiked interest rates for the ninth time this year to stave off inflation. The bank raised the amount commercial banks must borrow overnight at higher rates to 69 million pesos from 63 million pesos.

"That move caught the market off guard," the trader added.

The Mexico 4 5/8% bond due 2008 fell 0.45 to 101 bid while the 10 3/8% bond due 2009 slipped 0.20 to 122.70 bid. The 8.30% bond due 2031 lost 0.40 to 116.10 bid.

Also, political noise in Ecuador dragged down its paper. Fifty-two members of the 100-seat Congress replaced the entire Supreme Court in Ecuador Thursday, saying judges were biased against president Lucio Gutierrez.

Police barred the "fired" judges from entering their offices.

The country's step bond due 2030 fell a point to 84½ bid.

EM's improved balance sheets

Emerging markets are well positioned looking ahead, but investors are aware that a number of factors could harm risk appetite or U.S treasury yields, according to buyside source.

"The idiosyncratic risk is not the primary concern of the market," he said. "The market is focusing on whether or not there are exogenous factors, external factors that can throw our market off balance."

Factors such as a move in Treasuries or a dollar crisis, equities, or one of any number of things can turn the EM slightly sour, he noted.

The Philippines is one country that stands out for not moving in the right direction, he added.

"And even countries like Brazil and Turkey, which are vulnerable, are slugging along, doing the right thing little by little," he said.

"And you can always make an example out of Argentina but it's really kind of off the radar because they are in restructuring mode and the bulk of their debts aren't performing."

Heightened concerns over tight spreads in emerging markets have surfaced, as some anticipate a market correction. But keep in mind, fundamentals have improved, said the buyside source.

"You will never know what the exact level of equilibrium spreads is, but what we do know is that equilibrium level has to be a lot tighter than it was a few years ago just because the fundamentals have improved so much in these countries.

"There's still some people out there who believe this is a merely a liquidity/commodity story. But it's really more than that. These guys, for the most part, have repaired their balance sheets and have earned the upgrades that they have been given," commented the buyside source.

Vedanta attracts bidders

In the sleepy primary market, Vedanta Resources plc priced $500 million of notes due 2010 (BB/Ba2) at 99.739 to yield mid-swaps plus 275 basis points.

The book saw more than $1.5 billion of orders.

Barclays Capital and Deutsche Bank ran the Rule 144A/Regulation S offering.

Vedanta is India's largest producer of copper and zinc.

Brazilian Treasury secretary Joaquim Levy said the government is considering selling bonds indexed to the Brazilian real, according to a market source.

"The rumor has been in the market for such a long time," said another market source. "It makes sense for Brazil to issue in the real when the dollar is so weak."

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