Emerging market debt sees up tick in thin trading; Brazil 2040 crosses 121 handle again

By Reshmi Basu and Paul A. Harris

New York, Dec. 20 - Emerging market debt saw a slight uptick in thin trading, even as U.S. Treasury yields shot up Tuesday. Meanwhile the Brazil bond due 2040 pierced the 127 handle again.

Housing data in the United States showed a resilient housing market, seen as signaling that there would be no let up on the Federal Reserve's current monetary tightening campaign. This news sent the yield on the 10-year note to 4.47% from Monday's 4.44%.

Despite higher U.S. rates, emerging market debt saw slight gains, remarked sources.

While a trader said the market was illiquid with no heavy movers, Brazil approached another near-record high, crossing the 127 handle again.

During the session, the Brazil bond due 2040 added 0.40 to 127.10 bid, 127.15 offered. The Russia bond due 2030 slipped 0.13 to 111 5/8 bid, 112 offered. And the Venezuela bond due 2027 was unchanged at 116¾ bid, 116.90 offered

Nonetheless, the loser of the day again was Peru, whose bonds have come under attack on election worries. Investors are concerned that ex-colonel Ollanta Humala, who is campaigning on a nationalist platform, will beat out Wall Street favorite Lourdes Flores. That trepidation caused a sell-off across most of the country's curve.

The Peru bond due 2012 shed a quarter of a point to 113¾ bid, 115 offered while the bond due 2025 lost a quarter of a point to 98¼ bid, 99¼ offered. The bond due 2033 was also dragged down by a quarter of a point to 112 bid, 113 offered.

Nonetheless, emerging market debt overall saw tighter spreads. The trader added that the JP Morgan EMBI+ Index was tighter by two basis points.

Argentina and Venezuela's friendship

In another development, Argentina said it would sell up to $495.7 million in dollar-denominated bonds maturing in 2012 to Venezuela. Last week, president Nestor Kirchner said the country would repay its entire International Monetary Fund debt, a move not appreciated by the market. Argentina is making friends with Venezuela as it disengages itself from the IMF.

"I think any connection with [president Hugo] Chavez is always somewhat unsettling for the market, but in this market investors cannot be too picky about a sovereign credit's foreign friends," said an emerging market analyst.

"Yes, you'd rather see Argentina, or any other EM credit, more dependent on the IMF for external liquidity than on Venezuela. But the simple fact is that Kirchner's friendship with Chavez is, for now, paying off with access to external liquidity.

"This relationship is unsustainable in the long-term, but for the next year or so Venezuela should play an important role in propping up Argentina's solvency," he added.

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