Emerging market debt weaker on risk aversion; funds see outflows of $151 million

By Reshmi Basu and Paul A. Harris

New York, June 8 - Emerging market debt saw more selling pressure Thursday, triggered by worries of a potential cool down in the U.S. economy and ongoing concerns as to the direction of U.S. monetary policy.

In other news, emerging markets saw $151 million leave the asset class for the week ending June 7, according to Emerging Portfolio.com Fund Research. This is the fourth straight week of outflows. Dedicated emerging market bond funds saw $341 million exit last week, the largest decline so far this year.

On Thursday, both local and external markets remained in risk reduction mode.

"It's ugly. No one wants to be caught in this market," said a trader.

Thursday's performance was in contrast with Wednesday's session, which saw spreads tighten on the buyback story out of Brazil and a larger-than-expected rate hike by Turkey's central bank.

Thursday started off with a nervous tone on fears of a potential tighter global rate environment, according to an analyst note.

The day saw the European Central Bank, South Africa, South Korea and India all raise key lending rates. And of course, core financial markets have been rocked by speculation that the U.S. Federal Reserve will raise rates at its next meeting in June.

All of that interest rate uncertainty is making for a volatile market, said another market source.

"And then you throw in a slowdown in the U.S.," the source commented.

The analyst's note added that in a market with no risk premium, the result is volatile market underpinned by a bearish mood.

Meanwhile global equity markets were lower while local markets again came under fire Thursday.

Turkey lower

The Turkish lira erased Wednesday's gain, a day after the currency rallied on a bigger than expected increase in borrowing rates, which was meant to reassure investors about the country's resolve in combating inflation.

Turkey's local debt and equities fell hard while the country's external debt was not immune to the bearish climate, noted the trader.

"No one wants to buy risk," he said.

During the session, there was pressure throughout the Turkish curve. The country's bond due 2012 gave up 0.38 to 119.375 bid, 120.375 offered while the bond due 2030 lost 1.38 to 141.875 bid, 142.375 offered.

Over to Latin America, the benchmark Brazilian bond due 2040 shed 0.65 to 123.60 bid, 123.70 offered. The Colombian bond due 2033 was down 0.50 to 129.50 bid, 130.50 offered. The Ecuadorian bond due 2030 dipped 0.65 to 97.90 bid, 98.50 offered.

Finally the Venezuelan bond due 2030 slid 0.65 to 120.25 bid, 120.75 offered.

Philippines down despite bond delay

No one was spared during the session, observed the trader, who noted that even news that the Philippines would not tap the capital markets anytime soon did little to curb the current sell-off.

National Treasurer Omar Cruz said the country was in no rush to issue new bonds, according to press reports.

Earlier this week, the Republic of the Philippines sent out a request for proposals to investment banks as it seeks to complete its 2006 funding by raising up to $1 billion in the international debt markets.

The Philippines had planned to raise $3.1 billion in 2006, of which it has so far funded $2.1 billion.

In late afternoon, the Philippine bond due 2025 was spotted lower by 0.19 to 124.50 bid, 124.93 offered.

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