Emerging market debt pulled down by Brazil, Treasuries; oil producers higher

By Reshmi Basu and Paul A. Harris

New York, Aug. 1 - Emerging market debt prices were weaker Monday as U.S. Treasuries weakened on surprisingly strong economic data. Also adding to risk aversion, the market is unable to shake its angst over the lingering Brazilian scandal.

At the end of Monday's trading session in Asia, spreads for Asian names were firmer, said a market source. Demand was seen for recent issued from Hong Kong and Chinese corporates such as China Merchant and China Overseas.

The spread for China Merchant's bond due 2015 (Ba2/BBB-) tightened one basis point Monday to 121 basis points more than Treasuries from Friday's Asian close.

The source added that the Philippines was trading below 500 basis points over Treasuries on the long end. There was some demand from local investors, added the source.

During the trading session in New York, stronger than expected economic data in the United States pushed up Treasury yields, which tugged at emerging market debt prices. Nonetheless, spreads narrowed slightly, said sources.

The Institute for Supply Management said its manufacturing index rose to 56.6% in July from 53.8% in June, which pushed up Treasury yields to a three-month high.

The yield on the 10-year note stood at 4.31% by the end of the session, up from 4.29% on Friday.

"The situation in Brazil has also taken its toll on prices," said a Latin American debt strategist at Refco EM.

"We've seen weakness. And I think the trend is to continue in the following days," he added.

"We've seen weakness in Brazil. We've also seen some weakness in Colombia".

During the session, the Brazil bond due 2040 lost 0.20 to 117.30 bid. The Colombia bond due 2009 fell 0.30 to 113.60 bid while the bond due 2033 was down 3/8 of a point to 117½ bid.

Meanwhile, oil producers emerged as the winners during Monday's session. Oil prices spiked on fears that the death of Saudi Arabian king Fahd bin Abdul Aziz Al Saud would create instability in the country. The price of oil closed at $61.55 a barrel.

The Ecuador bond due 2012 was up one point to 86¾ bid. The Venezuela bond due 2027 gained 0.35 to 104.85 bid.

John Snow in Brazil

Meanwhile U.S. Treasury secretary John Snow's visit to Brazil may help give some support to the embattled Brazilian president, said the Refco strategist.

Snow met with central bank president Henrique Meirelles and finance minister Antonio Palocci Monday.

Investors have become more risk adverse on fears that president Luiz Inácio Lula da Silva will become implicated in the "bribes for votes" scandal.

"Investors don't want to see Lula personally tainted from this scandal," he said.

"Investors want it to be over soon. But I don't think this is the case. It has long legs and has touched very important individuals.

"He is going to have to continue to reshuffle his cabinet and give a lot more power to the opposition," he noted.

High-profile resignations have included the departure of Lula's chief of staff, José Dirceu, along with the president, the secretary general and the treasurer of his ruling Workers' Party.

On Monday, a deputy in the lower house resigned. Valdemar Costa Neto was the first lawmaker to do so.

Furthermore, the strategist added that the scandal paints a picture as to how next year's election will shape up.

"Definitely, there's a political cost to all of this."

But the strategist added that the reports on Lula's popularity are still strong, but "that could change very quickly."

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