Emerging market debt rallies on relief over jobs data, ending losing run; Brazil, Turkey issuance rumors

By Reshmi Basu and Paul A. Harris

New York, Jan. 7 - Emerging market debt snapped its three-day losing streak Friday in response to weaker-than-expected U.S. non-farm payroll numbers.

Payrolls increased 157,000, slightly less than the 175,000 expected.

While the number came in below market expectation, it was not weak enough to reverse the ongoing fears about the pace of the Federal Reserve's continuing rate hikes.

During Friday's session, U.S Treasuries dipped slightly. The yield on the 10-year note stood at 4.27% by the end of trading, up from 4.26% at the close of Thursday's session.

In emerging markets, Brazilian bonds surged early on those job numbers, but lost some of their momentum as the day progressed.

"A little selling in the afternoon," said a trader.

In the morning, the Brazil C bond was bid at 101 1/8, up 5/8 of a point. By mid-afternoon, the bond had fallen to 100 7/8 bid. At session's close, the bond was bid at 101.

The same story can be told for Brazil's benchmark bond due 2040. It surged 1.80 to 115½ bid. The bond ended the session at 114.35 bid.

During Friday's session, there was a mix of winners and losers.

The Ecuador bond due 2030 lost a quarter of a point to 85 bid. The Mexico bond due 2009 added 0.05 to 121.80 bid. The Russia bond due 2030 gained ½ a point to 102 bid. The Venezuela bond due 2027 fell a quarter of a point to 102 ½ bid.

Overall, the JP Morgan EMBI+ Index rose 0.l5% while its spread to Treasuries tightened five basis points to 369 basis points.

"It's been fairly quiet," said a buyside source. "It's been more of a relief trade.

Looking ahead, the overall performance of the emerging markets was not riding on the payroll numbers, he remarked.

"I think that the EM market is more concerned with technicals, as far as what is going to be issued as well as what is coming into the market.

"This week, we've had a pretty steady drumbeat down. We had a bit of rally today [Friday], but I think that's just more of a relief rally," he added.

Nonetheless, the payroll data has not changed the big picture as it offers little insight into the mindset of the Fed, he said.

"I think we're a little bit worried about the scenario from last year, where there was not an aggressive Fed.

"Today [Friday] was sort of head scratcher for the market. They don't know what to do one-way or another."

Rumors of new issues from Brazil and Turkey

This is the time of the year when annual rumors of new paper from Brazil and Turkey resurface. January has traditionally been the month where these two sovereigns hit the capital markets.

"I've been hearing the rumors of Brazil and Turkey, but nothing firm," said the buyside source.

Furthermore, the thought of new sovereign paper has put the market on edge, he noted.

"That's one of the reasons why we had a correction this week.

"People are expecting the supply and they want to cheapen up the bonds, so do it now."

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