Emerging market spreads tighten on short covering, Brazil recovers

By Reshmi Basu and Paul A. Harris

New York, May 5 - Spreads on emerging market debt narrowed as investors covered short positions from last week's frenzied sell off.

"There has been a little bit of short covering," said a trader. "That's why you saw the EMBI tightening a little bit."

The JP Morgan EMBI Index saw its spread to Treasuries tighten by nine basis points during the session. In absolute terms it fell 0.05% during the day.

While the Federal Open Market Committee decided to keep the short-term interest rates steady at 1%, the committee did say that an interest hike would take place at a "measured" pace.

"I think investors are interpreting the Fed's statement as a move to flexibility," said an emerging market research analyst.

"The Fed is now on record essentially saying that it will move to fight inflation as soon as it needs to, though it doesn't expect to have to tighten the screws excessively in the near term," he said.

But while last week's bloodshed seems to have subsided for now, Friday's employment figures could send the market into another tailspin, depending on the strength of those figures.

"Everybody is paying attention to what Greenspan has been saying. And this week we are going to have the non-farm payroll data, which will be a big number," said the trader.

The economy added 308,000 jobs in March, the largest gain in nearly four years. Economists are predicting the creation of 168,000 jobs in April.

Brazil, Turkey do better

Both Brazil and Turkey outperformed the broader emerging markets. In absolute terms they gained slightly, as measured by their EMBI Index components and both saw their spreads narrow.

Brazil's EMBI component rose 0.03%. Its spread to Treasuries tightened by 16 basis points.

And Brazil's benchmark C bond was up 0.94 to 91.687 bid, 91.750 offered, while its bond due 2040 was up 1.30 to 92.05 bid, 92.25 offered.

"There has been a lot of volatility over the past three weeks," said the trader. "We saw a lot of people selling Brazil short and now they are covering."

Despite Wednesday's rebound, there are still questions about where it is heading.

"But where it's going to go from here is hard to say," said the trader.

Brazil could potentially stop investors from running to door with structural reform, but such measures could be lethal to political support within the country.

"There's always something these countries can do to restore confidence - real progress on structural reforms could help shore up investor sentiment," said the emerging markets analyst.

"Brazil could push forward its structural reform agenda to prove its commitment to market-friendly policies.

"But politically speaking it's probably unrealistic to expect any significant new progress on the reform front.

Meanwhile Turkey saw its EMBI Index component rise 0.52%. Its spread to Treasuries tightened by 14 basis points.

Turkey's sovereign bond due 2030 was down 0.6 to 125.50 bid, 127 offered in afternoon trading then rebounded a little to end flat by the close of session.

Turkey's bond due 2034 was down 0.50 to 91.75 bid, 92.75 offered.

Meanwhile Venezuela's bond due 2027 was up 0.75 to 81.6 bid, 82.40 offered.

Agrokor prices

In primary action Wednesday, Agrokor dd priced its €100 million add on to its €130 million 11% senior secured notes due 2007 at 102.333.

Proceeds will be used to refinance debt and for general corporate purposes.

Deutsche Bank was the bookrunner on the Regulation S issue for the Croatian food company.

Thailand talk narrows

Thailand's planned offering of $1 billion of three-year floating-rate notes is deal is doing extremely well, said a market source.

Talk on the deal was slimmed down to six-month Libor plus 11.5 basis points from the earlier level of six-month Libor plus 12.5 to 13.5 basis points.

Pricing is expected during Asian market hours Thursday.

Proceeds will be used to pay back higher interest loans from the World Bank and Asian Development Bank.

Barclays Capital is underwriting the deal.

Meanwhile, adding to the pipeline is Czech city Ostrava. The city is planning a €100 million 10-year bond offering via Deutsche Bank.

Pricing is expected in July for the Regulation S issue.

Ostrava is the largest city in North Moravia, and the administrative center of the region.

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