Emerging market debt grinds tighter; U.S. job numbers higher than expected

By Reshmi Basu and Paul A. Harris

New York, March 10 - Spreads for emerging market debt narrowed Friday during a somewhat volatile session, as the yield on the 10-year U.S. Treasury shot up to 4.77% in response to robust job numbers.

The U.S. economy created 243,000 new jobs last month, according to the Labor Department. That stronger-than-expected number cemented market consensus that the Federal Reserve will raise rates two more times to curtail inflation.

"The market is still trying to figure out exactly what the numbers mean and what it means to EM," said a source.

Earlier in the week just completed, emerging markets sold off on risk reduction trades, noted a market source.

The market stabilized on Thursday - but left investors still unsure as to how many legs the correction has, he noted.

"The market is readjusting to the fact that global liquidity will taper off."

Meanwhile a trader described Friday's session as "volatile" on Treasuries weakness but said that the market overall was on better footing than at the start of the week.

During the session, the Brazilian bond due 2040 added 0.80 to 130.60 bid, 130.70 offered.

The Ecuadorian bond due 2030 moved up 0.75 to 97.25 bid, 98 offered. The Russian bond due 2030 gained 0.25 to 110.125 bid, 110.625 offered. The Venezuelan bond due 2027 gained 1.00 to 125.65 bid, 126.10 offered.

EM supported

After a stellar start to 2006 as spreads grinded to record lows, emerging markets saw a slight correction in March, ignited by weak U.S. Treasuries on the back of policy adjustments by the European Central Bank as well as speculation that the Bank of Japan would end its five-year ultra loose monetary policy, which eventually it did on Thursday.

Asian and non-traditional investors poured in billion of dollars into the market at the start of the year, but by the end of February, bids were disappearing. As trading volumes diminished, the market became more susceptible to external shocks, according to a market source.

But Thursday's session saw an end to the "weak" sell-off, observed the market source. The source noted that much of the selling occurred among dealers. Moreover, Thursday's session saw traders starting to cover their short positions.

Higher global rates in the future are not the end-all for the asset class, noted the source.

High commodity prices have allowed emerging markets nations to deleverage themselves by building up international reserves, retiring debt and increasing their reliance on local markets.

In fact, the source noted the recent sell-off showed how well the market is supported.

There was no panic selling. And additionally, buyers came in on dips, particularly in higher beta credits, the source said.

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