Emerging market debt tightens on Brazil's buyback; Peru up on relief rally

By Reshmi Basu and Paul A. Harris

New York, June 5 - Emerging market debt saw a more positive tone Monday on the back of Brazil's announcement that the country would buy back up to $4 billion of foreign-currency denominated bonds.

Spreads for emerging market debt were slightly tighter on the expectation of reduced supply, according to a market source. At session's end, the spread on the JP Morgan EMBI Global Diversified index tightened by five basis points to 205 basis points over U.S. Treasuries.

After Brazil's morning announcement Monday, the bellwether Brazilian bond due 2040 was up one point. In late afternoon trade, the bond was spotted at 123.95 bid, 124.10 offered, up 1.20 points.

Meanwhile the country's component of the JP Morgan EMBI Global Diversified index narrowed 13 basis points versus U.S. Treasuries.

The other headline to dominate Monday's session came from Peru.

On the election front, Peru saw a relief rally on news that former president Alan Garcia defeated nationalist Ollanta Humala in the presidential election, according to Enrique Alvarez, Latin American debt strategist for research firm IDEAglobal.

However, Peru's local market outperformed the external market, he noted.

During the session, the Peruvian bond due 2012 was up 0.60 to 112.25 bid, 112.60 offered.

Turkey, Mexico see red

Elsewhere, both Turkish local and external markets saw a volatile session Monday, after Friday's release of higher-than-expected inflationary numbers spooked investors and cut their appetite for risk.

Turkish bonds stayed in the red Monday. During the session, the bond due 2025 slid 0.38 to 119.625 bid, 120.625 offered.

Over to Mexico, local markets were relatively quiet for most of the session, according to a market source. That was until the market interpreted comments made by U.S. Federal Reserve chief Ben Bernanke as rather hawkish. Bernanke warned that recent increases in inflationary readings were "unwelcome" and that there are signs that the U.S. economy is entering a transitional period.

Currencies and Mexican rates were slightly derailed by his hawkish comments. The peso ended at 11.33 versus the dollar after opening at 11.27. Mexican stocks fell by 2.5% on the back of weaker equity markets in the region.

Mexico's external debt also took its cue from higher U.S. Treasury yields.

During the session, the Mexican bond due 2034 shed 0.65 to close at 98.30 bid, 98.60 offered.

One market source described the session as another bout of short covering, which has become a daily routine for emerging markets. The market rallies as local rates in Brazil or Turkey widen. Then the gains peter out and the market turns pessimistic on hedge trades.

Expect more volatility

Nonetheless, Monday's session was seen as providing zero clues as to the direction of emerging markets.

One trader described the market tone as "wish-washy and cautious."

And most agreed that market's recent volatility would continue.

"I foresee further volatility," predicted Alvarez.

"I don't think we've necessarily put in a low," he said.

He added that the market faces many risk factors such as the fluctuation of oil prices due to supply concerns and, of course, the future path of U.S. monetary policy.

Additionally, a potential slowdown in the U.S. economy will lower the demand for commodities, which in turn will hurt the Latin American region. And as of now, investors are grappling for insight into whether or not such as slowdown will occur. And if so, what the magnitude will be.

"It's a cautionary environment," Alvarez remarked.

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