Emerging market debt trades flat as books close; Peru down on election concerns

By Reshmi Basu and Paul A. Harris

New York, Dec. 19 - Emerging market traded flat Monday in thin trading as investors closed out their books ahead of the holiday break.

Nonetheless, the loser of the day was Peru, whose financial markets were battered by election concerns. Ex-colonel Ollanta Humala, who is campaigning on a nationalist platform, is seeing a rise in momentum over Wall Street favorite Lourdes Flores in opinion polls.

Peru's equity index sank 6.7%, the largest fall since 2000, according to Enrique Alvarez, Latin America debt strategist for IDEAglobal.

He said that Peru's underperformance correlates with the unofficial leftist victory of Evo Morales in Bolivia.

"It delivers a negative shift for Peruvian politics moving forward. And I think there's a slight negative connotation for Chile," Alvarez added.

Election uncertainty pulled down the country's debt prices. And that uncertainty is expected remain until the April election.

At session's end, the Peruvian bond due 2033 lost a quarter of a point to 112¼ bid, 113¼ offered.

Argentina tad lower

Argentina was a tad lower to unchanged after plummeting on Friday, said sources. After market close Thursday, president Nestor Kirchner surprised investors by announcing that Argentina would pay the entire $9.9 billion owed to the IMF in the next two weeks.

Dollar restructured bonds saw a half point drop, according to Alvarez. He added that some of the euro-denominated bonds saw a bigger fall on the back of lower liquidity. The Merval was also down 1.44%, a sign that there is stress on the domestic front.

At session's end, the Argentine discount bond due 2033 lost half a point to 81 bid, 81¾ offered. Meanwhile the par bond due 2038 was unchanged at 31¾ bid, 32½ offered.

Overall, trading was slow, said a trader, adding that most sovereign bonds were unchanged or they saw a negligible movement for the day.

During the session, the Brazilian bond due 2040 added 0.05 to 126.60 bid, 126.75 offered. The Turkish bond due 2012 gained 0.13 to 126 3/8 bid, 127 1/8 offered. The Venezuelan bond due 2027 was down 0.10 to 116.50 bid, 116.90 offered. The Russian bond due 2030 lost 0.13 to 111.83 bid, 112.125 offered.

Local market buzz

Emerging market debt closed out the year as a top performing asset class, noted a market source. However, there is fear that with spreads so tight, the asset class will see a correction in 2006.

Nonetheless, the tone is positive and it's much too early to turn bearish, added the source.

The source added that "liquidity" was an issue for the market looking ahead as "U.S. rates are expected to rise."

Moreover the lingering question of 2005 will also be the question of 2006: where can investors find attractive valuations? And the answer appears to be local markets.

Local markets will see an up tick in performance, especially in Latin America and Turkey, said the source.

High commodity prices will continue to give support to the Latin American region, he noted. Additionally, 2006 is expected to see less external debt, adding to the buzz surrounding local markets.

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