Emerging market debt up on Treasuries pick up; Brazil C bond jumps to par

By Reshmi Basu and Paul A. Harris

New York, Oct. 4 - In thin trading, emerging market debt traded higher while U.S. Treasury edged upwards Monday, as investors remain in locked position before Friday's release of U.S. job data.

"Trading is light," said a trader. "No one is making any substantial moves ahead of that report."

During Monday's session, U.S Treasury prices nudged higher, pushing emerging market debt up. The yield on the 10-year U.S Treasury note was 4.17% from Friday's 4.19%.

On Tuesday, the Treasury market is expected to take its cue from the Fed chairman Alan Greenspan, who is speaking at the American Bankers Association annual convention at 10:30 a.m. ET.

Overall, emerging market debt was up. The Russia bond due 2030 added 3/8 of a point to 96 5/8 bid. The Venezuela bond due 2027 gained 1.30 to 100 bid. The Mexico bond due 2008 was up 0.050 to 114.45 bid.

But the big winner of the day belonged to Brazil. The Brazil C bond rose 1.123 to 100.060 bid while the bond due 2040 racked up gains of 2.050 to 113.90 bid.

More good news keeps on coming out of Brazil, said the trader.

President Luiz Inacio Lula da Silva's Workers' Party (PT) had resounding election victories on Sunday. The PT won mayoral races in six of 26 state capitals, and will face run-offs in at least eight others later this month.

"Everyone likes the story," said the trader. "But at the same time, I think there's also a little nervous energy out there that at some point, it has to come down after moving so far."

Reading the IMF meeting

The focus of the International Monetary Fund meeting held this weekend revolved around China, oil, commodities and the United States, according to a buyside source, who attended the meeting.

"You have some people saying that most of the growth in Latin America has been export-led and that's counting increased volumes of imports from China and higher prices because of the weaker dollar.

"Who knows what is going to happen with China?

"Where do we go from here? We have C bonds bid at 100 today [Monday]. That's call price or close to call price," said the buyside source.

"Everything has been great. But who guarantees that it will continue to be so?"

He added that investors can either choose to play, play a little or not play at all in emerging markets.

"The question is how big will it [market correction] be versus everywhere else?"

The source added he had mixed feelings coming out of the IMF meeting.

"Had I had negative tone, I would have said, let's sell. If I had a positive tone, I would have said, let's add.

"I wouldn't be adding here. The question is, how do I really play."

China to roadshow sovereign

The People's Republic of China is expected to begin an international roadshow as early as next week for $1.5-$2 billion equivalent of sovereign bonds.

The dollar-denominated tranche is expected to mature in 2009. The bookrunners will be Goldman Sachs & Co., JP Morgan, Merrill Lynch & Co. and Morgan Stanley.

The euro-denominated piece is expected to mature in 2014. The bookrunners for the euro tranche will be BNP Paribas, Deutsche Bank and UBS AG.

Argentina's debt exchange game

Very few investors have nice things to say about Argentina and its troubled negotiations with bondholders over $100 billion in defaulted debt, according to the buyside source.

But as the clock ticks, expectations are lowered. And last week the Securities and Exchange Commission gave its approval to the country's restructuring proposal.

"If you believe that the Argentines are smart, then you should be able to say that they are managing this process beautifully even though no one likes it.

"Because everyone will be happy if 70% to 75% of investors exchange. No one is talking about 90%.

"And everyone knows that you already have 35% to 40% in Argentina that's captive, so you are really talking about a little more than half of what you have overseas," he said.

He added that this is a perfect time for Argentina to push through the transaction, given the "low spreads, low yields - this is the moment to do it because it won't be like this forever."

Last week, Argentine bonds rose on rumors that the country would sweeten the deal by five to seven cents to 30 to 32 cents.

"That's where I think they are managing their expectations very well and lowering those and saying, "no way, no way, no way," and so the market is saying, "no participation, no participation"- but not necessarily in the prices.

"I think if they really understand their situation, they will do something that will make people happy.

"No one knows anything. Everyone is just giving their gut feeling or their intuition or hopes," added the buyside source.

Looking ahead, questions have been raised as to how the stand-off will be resolved between bondholders and Buenos Aires if and when the courts enter the picture.

Last week, Harold Baer, a New York judge, delivered a victory to creditors. He issued a ruling that temporarily froze a $250 million debt restructuring proposal by the government of Mendoza, a province in western Argentina.

"How are you going to enact payments from Argentina when you have a big holdout group that could embargo your payments and just take the money for themselves?

"You exchanged your old instruments and at the same time, you are not getting paid on it.

"Those were concerns [at the IMF meeting], although Argentine does claim they have a way around it," he said.

The Argentine bond due 2008 was unchanged at 31¼ bid during Monday's session.

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