Treasury rout fails to foil EM; yield thirst quells Ecuador, Brazil, Philippines headline noise

By Paul A. Harris

St. Louis, Aug. 5 - Positive jobs numbers and a steady unemployment rate sent U.S. Treasury prices tumbling on Friday but emerging markets sovereigns - some of them lately battered by headline news - held in and even tightened relative to rising Treasury yields.

Elsewhere a thirst for yield among investors appears to have overcome that negative headline news among sovereign issuers Brazil, Ecuador and the Philippines, as bond prices steadied or advanced.

And Russia, subject of a credit rating upgrade to BBB from Fitch Ratings on Wednesday, was flat on the day.

Meanwhile the primary market stood stock-still on Friday, and is likely to remain that way, sources said, at least until the Federal Reserve Federal Open Market Committee convenes on Tuesday.

It may remain very quiet for the rest of the summer, sources added.

Treasuries dive on strong jobs numbers

U.S. Treasury prices dove on Friday after July non-farm payrolls numbers exceeded expectations, growing by 207,000 new jobs in July, according to one source who added that the growth exceeded expectations of 183,000 new jobs.

Meanwhile, the source added, the July unemployment rate remained at 5.0%.

Enrique Alvarez, Latin American strategist for IDEAGlobal in New York, told Prospect News that emerging markets hung in relative to the rout in Treasuries.

"I thought that the market did exceptionally well today given the fact that we're basically at 4.40% with the 10-year Treasury," Alvarez said.

Weathering the headline noise

Alvarez added that the sovereign bonds of Brazil and Ecuador, lately suffering from political turmoil in those countries, were seen tighter on Friday.

With regard to Brazil, the perception seems to be taking hold that President Lula's mandate will not be derailed by impeachment proceedings resulting from the money-for-votes scandal now unfolding in the Brazilian legislature.

On Tuesday, Lula's former chief-of-staff Jose Dirceu testified before the Ethics Council, essentially shielding Lula by denying accusations of vote fraud.

Although the political drama in Brazil appears to have some legs, sources said Friday that it appears Lula will prevail.

"I think the market has been trading on a relief sentiment," strategist Alvarez said Friday afternoon, adding that Brazil had returned 0.04% on the session.

"The political environment has cooled since the testimony of Dirceu."

Ecuador trades up

Elsewhere another Latin American country with political noise, Ecuador, also advanced during the session, according to Alvarez.

The news out of Ecuador had finance minister Rafael Correa resigning in the wake of a confrontation with president Alfredo Palacio, with the latter accepting his minister's resignation on Thursday.

Sources say that Correa is a critic of the International Monetary Fund, as well as of other lenders to Ecuador, and in the meantime is an advocate of Ecuador fostering close relationships with Venezuelan president Hugo Chavez.

Correa's replacement, sources say, is likely to hold opposite views.

Alvarez said that Ecuador posted a 0.62% return on Friday.

"Fortunately for the market, Ecuador is sort of an isolated case, even though the impact of the latest news is uncertain, with regard to prices.

"In the present environment, with Brazil regaining some of its leadership and its upside push, people are again making a grab for high beta credits. And Ecuador is going along for the ride."

Alvarez said that at present investors appear to have "an indiscriminate thirst for yield.

"It doesn't matter what the political noise is, or what the consequences are in the medium term."

Philippines see-saws

As the Friday session got underway sources saw firmness in the longer dated paper of the Philippines, another name rocked by political scandals, in this case in the administration of president Gloria Macapagal-Arroyo.

However later in the day a market source in New York told Prospect News that the Philippines, in U.S. trading, had given up the slight gains it had made earlier in the Asian trading session.

Russia flat trailing Fitch upgrade

Elsewhere sources told Prospect News that Russian debt traded flat following the upgrade of Russia's sovereign rating to BBB by Fitch earlier in the week.

One source had the Russia sovereign due 2030 one basis point wider on a spread basis, and suggested that the upgrade had already been factored into bond prices.

Optimism overdone?

Another market source, in an email message, told Prospect News that EM continues to trade solidly, but wondered whether investors might be getting a little overzealous.

"Brazil is the star player again today on continued enthusiasm about the political scandal," the source wrote, quoting the benchmark Brazil bonds due 2040 up a quarter point while Treasuries were concurrently off half a point.

"Venezuela is also doing well today on the spike in oil," the source added.

"The lower beta names like Mexico and Russia are basically trading in line with [Treasuries].

"In general, there's still no sense that the recent run-up in [Treasury] yields will unwind the bid for EM paper any time soon, especially with commodities prices continuing to do so well.

"I think the optimism is overdone here - Brazil still has a lot of work to do before it's out of the political woods, and the rise in U.S. rates will eventually make a lot of investors question their reach for yields, especially if [10-year Treasuries] push past 4.50%, which looks quite possible right now."

Bid for corporates

One source told Prospect News that there continues to be demand for longer dated corporate paper, and cited recent perpetuals from Brazilian companies. He saw the recently priced Companhia Siderurgica Nacional SA 9½% notes at 99.90 bid, 100.25 offered and Unibanco-Uniao de Banco SA's 8.7% note trading at 99.75 bid, 100.10 offered.

Both issues, the source said, had traded up from Thursday levels.

Primary quiet ahead of FOMC

Meanwhile, when Prospect News pressed sources for any morsels of news that might be emanating from the new issue market, those sources uniformly turned up empty pockets.

The Federal Open Market Committee meeting on Tuesday brings a little uncertainty.

One common theme, however, was that no one is likely to jump into the market before the Federal Reserve weighs in on the latest indications from the U.S. economy on Tuesday.

Sources uniformly anticipate that the meeting will result in another 25 basis point increase in the fed funds target rate.

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