Emerging market debt down on softness in Treasuries; Brazil's Copom to raise rates

By Reshmi Basu and Paul A. Harris

New York, March 11 - A weaker U.S Treasuries market pulled down emerging market debt Friday, as Brazil led the downdraft in prices.

A wider trade deficit report in the United States coupled with a weaker dollar raised more concerns that the Federal Reserve would adopt a more aggressive monetary policy to fight inflation.

U.S. Treasuries were knocked Friday, as the 10-year note appeared to be setting a new range. The yield on the 10-year note stood at 4.54% late Friday from Thursday's 4.47%.

Emerging market debt was much softer, said a trader.

"It kind of whipped around this afternoon," he said. "[Brazil] '40s traded down almost two points."

Brazil, in fact, led the slump, dragging down other Latin American credits. During the session, the Brazil C bond fell 0.44 to 101.06 bid while the bond due 2040 dropped 1.90 to 114.10 bid. The Ecuador bond due 2030 tumbled two points to 93¾ bid. The Mexico bond due 2009 slipped 0.35 to 119.65 bid.

Colombia was well bid early in the session, noted the trader. But once Brazil started to dip, Colombia followed. Its bond due 2009 ended down 0.25 to 112.60 bid.

Meanwhile, high oil prices are helping Venezuela fend off the Treasuries softness, said the trader.

"Venezuela is doing alright. It's probably one of the better ones," the trader noted.

Venezuela's global bonds due 2007 were quoted at 108.00 bid 108.50 offered, slightly lower on the bid-side from Wednesday's 108.25 bid, 108.50 offered.

The Venezuela global bonds due 2018 were at 135.125 bid 136.063 offered, having eased from Wednesday's 136.25 bid 137.25 offered. The Venezuela global bonds due 2027 retreated to 103.90 bid 104.75 offered from 104.75 bid 105.60 offered on Wednesday.

"Treasuries are weaker and people are a little nervous about what is going to happen," added the trader.

With Wednesday's sell-off and subsequent little relief rally, "people wanted to pare down their positions before the weekend came."

Treasuries setting new levels

Emerging market debt is closely tracking U.S. Treasuries - and that means heading lower. On March 2 the yield on the 10-year note stood at 4.38%. In a week, the 10-year has blown out 16 basis points.

"The Treasury is crossing a very important resistance level on a yield basis which is 4.55%," said Enrique Alvarez, Latin America debt strategist for think tank IDEAglobal.

"The market is definitely reflecting that."

If Treasuries are successful in establishing a new yield range, the market will not have the strength to mark new tightening levels on a spread basis, he added.

"It should remain in this general area. Again, it's very dependent on what U.S. Treasuries do."

Copom to raise rates

Meanwhile expectations that Brazil interest rates have peaked look ill-founded.

Brazil's inflation in February rose 0.59%, coming in slightly higher than the 0.58% in January, according to the Brazilian Census. The Central Bank is expected to raise the benchmark Selic rate at this week's meeting.

"A lot of people were very confident that this would mark the start of a pause phase for the Copom," remarked Alvarez.

"But that doesn't seem to be the case. Estimations in Brazil have been rising continuously over the last couple of weeks. People are again flirting with the idea that we may rise by another half percent."

IDEAglobal is expecting a quarter percent hike.

Recent economic data in Brazil has indicated a slowdown in the expansion of Brazil's economy, he noted. That is a concern for Brazil.

In separate news, Tuesday is the final day of the 30-day notification period for the Brazilian Treasury to repurchase C-bonds. A market source said the increased market volatility makes the scenario less likely.

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