U.S Treasuries bring down emerging market debt; Mexico prices $1 billion add-on

By Reshmi Basu and Paul A. Harris

New York, Jan. 4 - Emerging market debt reacted harshly to the drop in U.S Treasuries Tuesday but nonetheless Mexico re-opened its bonds due March 2015 for $1 billion more.

Inflation worries reared ugly again, after minutes from the Dec. 14 meeting of Federal Open Market Committee showed a divided camp on the outlook for prices.

The winning camp insisted that inflation is in check. But the minutes showed that a number of central bankers were becoming increasingly concerned that the weak dollar, higher energy prices and a slowdown in productivity would result in higher prices.

That split was enough to spook the U.S Treasury market. The yield on the 10-year note rose to 4.29% from 4.21% at Monday's close.

"We were fine before the Treasuries started falling off," said a buyside source.

During Tuesday's trading, the JP Morgan EMBI+ Index slid 0.90%. Its spread to Treasuries widened three basis points to 361 basis points.

The Brazil C bond lost 1.188 points to 101.062 bid while the country's bond due 2040 fell 3.15 points to 115¼ bid. The Colombia bond due 2009 fell 0.15 of a point to 114.35 bid while its bond due 2012 slipped 0.575 of a point to 114.80 bid. The Ecuador bond due 2030 dropped 2¼ points to 84½ bid. The Russia bond due 2030 was down 1¼ points to 101¾ bid.

"There's not a lot of liquidity in the market," said a Latin America debt strategist for Refco EM.

"I think a lot of people are still on vacation and will slowly make it back this week. Hopefully, we will have more activity going as the weekend approaches," he said.

"Overall, once we have more normalized activity, I'm expecting a lot more allocations into emerging markets."

Emerging market debt will surely get a boost from all of the good press it has been receiving. Positive returns for the two last years have turned emerging market debt into a reputable asset class, he noted.

"You will see more non-dedicated investors feeling a lot more positive about the region. That's definitely going to bring a lot more money into the markets, so it going to give you more liquidity - at least for the first couple of months for the year," he predicted.

Mexico reopens 2015 bonds

On Tuesday, the United Mexican States added $1 billion to its March 2015 bonds in a transaction via Citigroup and JP Morgan. The add-on was priced at 107.10 to yield 5.694% or a spread of Treasuries plus 145 basis points.

"It was priced in line with existing debt - not a lot of news there," said the debt strategist.

"What they are trying to do is complete their refinancing needs for 2005 and 2006."

The move to complete as much of the country's financing needs for 2006 is smart, given that it is a presidential election year in Mexico, the strategist remarked.

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