Emerging market debt trades flat with less volatility; Brazil up, Ecuador down

By Reshmi Basu and Paul A. Harris

New York, April 25 - Emerging market debt opened the week with less volatility Monday, as Brazil moved up and Ecuador moved down.

Last week, the market was shaken by bumps in the U.S. equities market, U.S. Treasuries and political raucous in Ecuador.

"It was a much quieter day," said a trader. "Things were pretty flat."

Monday's session saw more stability as volatility in both equities and Treasuries subsided. Treasuries ended the session flat as the yield on the 10-year note stood at 4.24%, said market sources.

However, emerging markets gains were not uniform across the board, as Brazil edged higher but credits such as Ecuador and Venezuela were down, according to a Latin America debt strategist at Refco EM.

"Mexico traded flat to lower and Brazil was up," he said.

The Brazil C bond gained 0.312 to 100¼ bid while the bond due 2040 added 0.65 to 114.20 bid. The Ecuador bond due 2030 fell 1¾ points to 76 ½ bid. Mexico's bond due 2009 lost 0.45 to 118.15 bid. The Venezuela bond due 2027 was unchanged at 99¼ bid while the bond due 2034 lost 0.10 to 99½ bid.

"Brazil is one of the most liquid markets," he said. While Brazil tends to trade heavily when the market is under pressure, it has more upside when the market is more confident, he commented. He added that Brazil might have been influenced by a morning release from the central bank that said that Brazilian economists increased their 2005 inflation forecast.

The median inflation prediction increased to 6.15% from 6.10% a week earlier, on concerns of rising oil.

Multiple influences

As the year has progressed, multiple factors have surfaced as drivers of trade in emerging markets.

"Depending on the day, depending on the news, you have more influence in the market," he said.

"Last week, we had the Ecuadorian situation that created a little bit of animosity in emerging markets," he commented.

The strategist said the Ecuador's paper has been spooked by comments made by the new economic minister Rafael Correa, who wants to redirect funds for social programs.

He noted that Federal Reserve comments on interest rates and the auto sector story also increased jitters in the market last week.

On Friday, Federal Reserve Board governor Donald Kohn said that interest rates would continue to rise at a "measured" pace to keep out inflation.

"Today [Monday], in that respect we had less news" he said, which gave the market some breathing room and allowed a slight recovery.

U.S. Treasuries, which traded mostly flat, "didn't have a lot of consequences in our market today [Monday]."

"I don't think it was a very dramatic day in emerging markets as we saw last week with Ecuador," he remarked.

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