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Emerging debt-Prices begin rebound from early January sell-off

January 12, 2005 | Reuters

Emerging sovereign debt rose on Wednesday but analysts and traders were hard pressed to identify one single trigger for the upbeat performance after the sector sold off in the first week of the year. The J.P. Morgan Emerging Markets Bond Index Plus (EMBI+) showed yield spreads seven basis points tighter at 370 basis points over benchmark U.S. Treasuries.

"There has been no news or trigger. The only thing I could suggest is that the market is 35 basis points wider in the opening week of the year, so for people who were looking to get into this market it looks like it is even better now," said James Croft, emerging markets debt trader at Commerzbank in London. The big losers at the start of the year, including Brazil, Russia and Turkey, all turned in solid performances on Wednesday.

All three suffered losses, especially Brazil and Turkey, in the first week of the year.

"I think this market is adjusting to the silly sell-off this past week or so rather than showing any fundamental strength," said one emerging markets trader at a German bank in London.

"It started with the Fed minutes and talk of upward pressures on rates and the issuance calendar, which sent Brazil careening lower, but the general mood is rebuild positions this week," the trader said.

Brazil's benchmark bond due 2040, also a bellweather for the sector, rose 0.688 points to bid 114.063, yielding 8.917 percent.

Its portion of the EMBI+, the largest, showed yield spreads tighter by 12 basis points to 421 basis points over U.S. Treasuries with total returns up 0.60 percent.

Turkey's benchmark sovereign bond due 2030 surged 1.125 points to bid 142.250, yielding 7.956 percent.

ARGENTINA'S PITCH

Argentina began to market its historic debt restructuring on Wednesday but is playing to a hostile crowd given a major portion of the holders of its defaulted debt are not pleased with offer. The swap will be formally launched on Jan. 14.

Argentina, which defaulted on $88.1 billion of sovereign debt in 2002 and now owes $102.6 billion because of past interest due, claims it can only pay up to $41.8 billion in new bonds.

Foreign bondholders warned on Wednesday that Italian banks and nearly 75 percent of U.S. institutions would reject Argentina's offer.

Argentina's defaulted 2008 bond, which is used as an indication of what traders believe bondholders could recoup, traded off 0.062 points to bid 32.313, yielding 64.618 percent. Despite the dip, the price is up from a bid of 32 on Jan. 10.

The International Monetary Fund's Executive Director Pier Carlo Padoan said on Wednesday that Argentina cannot say its debt problem has been resolved if less than 75 percent of creditors accept the terms of the restructuring which will be launched this week.

SOUTH AFRICA UPGRADE

South Africa's foreign currency bonds rose on Wednesday after Moody's Investors Service raised the country ceilings for its foreign currency debt and bank deposits.

"The foreign debt had already started to discount the upgrade. If you look at what it has done over the last few months, it has performed very well," said Leon Myburgh, South Africa strategist at Barclays Capital in Johannesburg.

"There has been some yield compression. The debt has performed very well and the improving credit story is backed by the building up of international reserves as well as the improving economic growth outlook," Myburgh added.

South Africa's sovereign bond due 2012 rose 0.25 points to bid 114.375, yielding 4.991 percent.

Separately, European Union member Hungary was downgraded by credit ratings agency Fitch in a fresh warning that it may miss its euro entry target because of a failure to rein in its budget deficit.


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