EM rallies on soft job numbers; India's UTI sells $150 million in notes

By Reshmi Basu and Paul A. Harris

New York, Aug. 3 - Emerging market debt locked in gains Friday on the back of weaker-than-expected U.S. non-farm payroll numbers, which reinforced market sentiment that the Federal Reserve's current monetary tightening campaign is coming to an end.

In the primary market, the capital markets saw India's first subordinated debt deal.

Private bank UTI Bank Ltd. sold $150 million of 15-year fixed-rate notes (Baa3/BB-) at 99.839 to yield mid-swaps plus 175 basis points.

Barclays Capital, Citigroup and Deutsche Bank were bookrunners for the Regulation S transaction.

Emerging market debt continued to tighten Friday, buoyed by market consensus that the Federal Open Market Committee will pause at its Aug. 8 meeting.

The asset class has posted positive returns in recent sessions as both U.S. Treasuries and equities have rallied on an expected Fed pause. Friday's soft employment data further reinforced that sentiment, providing yet another catalyst for emerging markets to tighten further, noted market sources.

The Labor Department reported that 113,000 new jobs were created in July, coming far short of the expectation of 145,000 jobs.

But not all core markets interpreted the numbers as good news. The U.S. stock market readjusted its focus onto how a potential economic slowdown could impact corporate earnings and closed the session in the red.

Meanwhile U.S. Treasuries rallied hard as the yield on the 10-year note reached a four-month low. By the end of trading, the yield on the note stood at 4.90% from Thursday's close of 4.96%.

"Overall, it was good session [for EM]," remarked a trader. "The EMBI was tighter by a few basis points, but for the week, spreads are pretty much unchanged," he added.

"Latam definitely saw a pick-up," observed the trader.

During the session, the bellwether Brazilian bond due 2040 added 0.50 to 129.15 bid, 129.20 offered. The Argentinean discount bond due 2033 was up 0.60 to 95.50 bid, 95.60 offered. The Uruguayan bond due 2033 jumped 1.25 to 100.25, 101.25. And the Venezuelan bonds due 2027 gained 0.85 to 124.35 bid, 124.65 offered.

The numbers confirmed that the U.S. economy is slowing down and that is raising speculation that the Fed will stop, said a market source, who added that the market is pricing two more Fed fund rate hikes for 2007.

"Emerging markets seems pretty happy about next week's pause," noted the trader.

Ukraine higher as PM named

In other news, Ukrainian bonds rallied as the parliament named Viktor Yanukovych prime minister Friday, thus putting an end to a four-month impasse.

In trading, the country's bond due 2013 rose 1.13 to 105.50 bid, 106 offered.

Elsewhere, Standard & Poor's said it cut its long-term foreign currency sovereign credit rating on Belize to CC from CCC-, after the government announced its plan to restructure its foreign and commercial bank debt.

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