Emerging market debt stalls without direction; Mexico's bonds unfazed by vote; $71.5 million inflows

By Reshmi Basu and Paul A. Harris

New York, April 8 - Emerging market debt was motionless Friday in light volume as investors remained sidelined. In the primary market, Venezuela priced $1.604 billion of 20-year notes at par to yield 7.65%.

An economic data vacuum in the United States coupled with a mixed up U.S. Treasuries market in recent sessions did little to give the market the go-ahead on Friday, said sources.

"There's not a lot of excitement going on," said Enrique Alvarez, Latin America debt strategist for IDEAglobal, who added that the Treasury market has yet to give emerging markets a buying mandate.

"Treasuries market's big move this week was to test 4.42% on the 10-year and it failed, so we're back at 4.48/4.49%, he said.

"It's really very undefined. We are midway in a range and we know all the worries that are out there - higher U.S. rates, inflation watch, so on and so forth."

Alvarez said that with no consistent data to provide new information about these worrying factors, investors are stuck.

Indeed, investors have been slow to return to the emerging bond markets. The market took in $71.5 million for the week ending April 6, ending a two-week slide, according to EmergingPortfolio.com Fund Research.

Illiquid market

A trader said that there was barely any action during the session.

"Pretty much everything was unchanged," he said.

"No volume. Stuff was just very quiet today [Friday]. Could have been America concerned with the pope or people were just tired from the week. There was almost no volume today [Friday]."

"Everything was within 10 cents of where it was last night."

Only the very liquid issues saw price movement, remarked Alvarez. The Brazil C bond was up 0.124 to 99.687 bid while the bond due 2040 gained 0.20 to 112.70 bid.

A sellside source remarked that broader emerging markets, in particular on the sovereign side, had settled down.

"We're trading in a fairly narrow range. I think we're seeing some profit-taking today [Friday]. But the market has had a pretty good week.

"Some of the higher-yielding Asian paper has not settled down all the way," remarked the source.

Looking ahead, how the market performs in the next few sessions is anyone's guess, added the trader.

"The whole market is confused. We could go up. We could go down. Everyone is a little skittish right now and trying to figure things out."

Mexico's vote priced in

Mexico bonds seemed unfazed by the Congress' late-night decision Thursday to strip Mexico City mayor Andres Manuel Lopez Obrador of his immunity

"On an absolute return basis, it was up a little bit," said Alvarez.

"I think overall you had mixed pricing in Mexico. The majority of issues were up maybe a quarter of a point," with the long end moving up a quarter of a point during an illiquid session.

He added that the vote was priced in and expected by the market.

"Does that mean it becomes a non-event? I don't think so. I think you are going to see further defensive posturing when it comes to Mexico" due to the fact that politics are going to remain unstable as the Obrador affair unfolds, he remarked.

The political noise in Mexico creates the possibility that Russia could briefly trade tight to Mexico, but it would only be temporary," an emerging market analyst said.

"When the dust settles, investors will realize that Russia isn't really very likely to rush out and pay down all its external debt, and that Mexico has a lot of positives to offset its political uncertainties."

On Friday, Obrador said he would comply with the attorney-general's office, who has asked a judge to issue an arrest warrant against him.

"The moment he receives that request, I am going to turn myself in at the jail," the mayor told reporters at his home.

The popular leftist leader was a clear favorite to win the presidential election in 2006, but may now be blocked from running. On Thursday, he announced his candidacy - just hours before congress was set to vote.

Obrador will likely faces charges that he ignored a court order to stop construction of a hospital access road on private land.

Venezuela sells $1.6 billion to locals

Venezuela sold $1.6 billion of 20-year eurobonds at par to yield 7.65%, the finance ministry said on Friday, in a deal targeted towards local investors. Investors could buy the bonds in bolivars at an exchange rate of 2,150 per dollar. Citigroup and JP Morgan ran the books.

The government received $4.4 billion in offers for the new bond, which was initially targeted as a minimum $1 billion issue. The new issue garnered demand, given that it allowed the domestic market to access dollars, commented sources.

"It's basically a liquidity absorption-type issue," explained Alvarez.

"They essentially floated it for the local market. The key to that is to try to absorb part of the liquidity that is accessible in the local system."

"Essentially, when it prices out and starts trading globally, what you get is the black market rate on your exchange rate but you are able to obtain dollars. It's a good thing for the domestic market," added Alvarez.

"It really has not had a supply effect on the market up until now. Overall, it's a positive thing for them to do as far as dealing with the local market."

Meanwhile, the current market condition has halted other sovereign issues from coming, said the sellside source.

"I wouldn't want to be Indonesia, out there with $1 billion, with the market the way it has been. They may continue to wait.

"Uruguay, which is out there with $500 million via Citigroup, already had a roadshow. They could probably come fairly quickly if they saw an opportunity.

"People have also been talking about El Salvador, but I don't believe that it has been officially mandated yet, so it will take a little while," remarked the source.

The sellside source added Turkey and the Philippines are also expected to tap the market.

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