Emerging market debt lifted by U.S jobs data; local currencies rally

By Reshmi Basu and Paul A. Harris

New York, March 4 - Emerging market debt rallied Friday as non-farm payroll numbers in the United States deflated concerns that the Federal Reserve would take a more aggressive monetary stance.

Payrolls added 262,000 jobs in February, higher than market consensus of 221,000 additional jobs. Despite the rise in payroll numbers, the U.S. Treasuries market found relief and emerging market debt rallied.

The yield on the 10-year Treasury note fell to 4.31% from Thursday's 4.38%.

One debt strategist was puzzled by the market reaction, given the strength of the numbers.

"I am totally confused because I thought 260,000 jobs is a pretty reasonably strong number," said the strategist.

There were rumors that some were looking for a figure as high as 300,000 jobs created, he said.

"But what we've seen is the U.S. Treasuries bond market rally and we've seen the dollar sell off."

If one added January's and February's payroll numbers together, the result would be a monthly rate of 200,000 jobs, which is 2.4 million jobs a year, a moderate acceleration from the 2 million jobs created last year, said the strategist,

"I didn't think it was a weak number but the market clearly had its own reason for drawing its own conclusion.

"I'm surprised by the strength in U.S. Treasuries and the weakness in the U.S. dollar," he remarked.

Across the board, emerging market debt rallied on the job numbers. The strategist added that most of the rally was from short covering.

The Brazil C bond moved up 3/8 of a point to 102 bid while the bond due 2040 gained 1.40 to 117.80 bid. The Ecuador bond due 2030 added half point to 95 bid. The Russia bond due 2030 added 0.812 to 105.812 bid. Turkey's bond due 2030 added one point to 144¾ bid. And Venezuela's bond due 2027 packed in 0.45 to 105.30 bid.

"It's a pretty uneventful payroll number," said a buyside source.

"I think if you had asked people earlier in the week what the market would do if you had a 262 number in payrolls they would not have guessed that it would have rallied."

Still the job numbers do not give a green light to investors to add more risk to their portfolios.

"We're heading towards signs that we are getting a little bit better job growth in the economy," said another buyside source.

"At the same time, it's not strong enough to warrant an accelerated hike.

"I think everybody is long at this point - long and cautious. I don't think this is a screaming buy. I think it just extends the time period on which people are willing to still hold on to their investments," said the source.

Local currencies rally

More and more emerging market investors are playing in local currencies in search of yield.

"Today [Friday] everything just rallied from the Turkish lira, Poland zloty, and Mexican peso - you name it", said the second buyside source. "This has been a good day for local currencies."

The Brazilian real had its first gain in four days.

"We had a little correction," said the debt strategist. "We did get it down to 2.57/2.58 [per dollar]. Now we're back to 2.65.

"On balance, a stronger real is typically good for bonds. A weaker real is typically bearish for bonds - that's the simple correlation.

"But the C bonds are completely decoupled from the recent weakness in the currency because the Cs are holding up above 102 [bid]," he observed.

"I say the external market is holding up extremely well."

Primary market action

In the primary market, Venezuela is expected to bring to market a euro deal via Deutsche Bank and UBS, according to the first buyside source.

"They called it a 'non-deal roadshow,' but they have a euro maturity, so I suspect that they want to raise the cash in time," the source commented.

The source also added that the proposed issuance of $500 million 10-year notes from Singapore's Noble will perform well, provided that enough yield is added.

JP Morgan is running the Rule 144A/Regulation S deal.

"In a market where people are looking for yield I suspect Noble will be okay. It's a power manufacturer-turned-petrochemical shipper," said the source.

"If you have been in the shipping industry during the last year you're doing real well because nobody had capacity in Asia. So the shippers were making a lot of money.

"Noble is being sold as much to high-grade accounts as it is to high-yield accounts. It's Ba1/BB+. It has more of a high-grade covenant package than a high-yield covenant package. The competitors are Bunge and Glencore, both of which are at the bottom rung of investment-grade credits.

"So the high grade-guys know the industry."

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