Emerging market debt lower on drop in jobless claims; inflows stand at $290 million for week

By Reshmi Basu and Paul A. Harris

New York. Dec. 16 - Emerging market debt prices fell Thursday in thin trading as U.S Treasuries crumbled on news of a sharp decline in U.S jobless claims.

"All emerging markets were lower today [Thursday]," said a Latin America debt strategist for Refco EM.

"Basically today [Thursday], the whole fixed-income world reacted to the numbers here in the U.S in reference to the Labor Department.

"That had a negative impact in emerging markets overall," he noted.

Emerging market trading was sullied Thursday as the Labor Department reported that initial job claims came in at 317,000, far below the 342,000 claims forecasted by Wall Street analysts.

Adding salt to wounds, minutes from the Federal Open Market Committee's Nov. 10 meeting revealed it was far more bullish about the economy than in previous session notes.

Gross domestic product "appeared to have become even more firmly established over recent months, despite the drag on higher energy prices," the minutes said.

That outlook put a drag on U.S Treasuries markets, as most now suspect that more Fed tightening is on its way. The yield on the 10-year note stood at 4.19% at the end of trading Thursday, up from Wednesday's 4.07%, widening 12 basis points in the biggest session decline in five months.

On Tuesday, the FOMC raised rates by 25 basis points.

However, emerging markets did outperform U.S Treasuries. By the end of the day, spreads had tightened six basis points to 376 basis points even as returns fell 0.26%, according to the JP Morgan EMBI Global Diversified Index.

Across the board, emerging market prices were down, according to a trader.

The Brazil C bond lost 1/8 of a point to 101 5/8 bid while the bond due 2040 slipped 0.40 to 117.40 bid. The Mexico bond due 2009 fell 0.20 to 122¾ bid. The Russia bond due 2030 slid 3/8 of a point to 102 7/8 bid.

"Trading was light. We're seeing holiday volumes," he noted.

Inflows at $290 million

Emerging market bond funds had inflows of $290 million in the week ending Dec. 15, according to EmergingPortfolio.com Fund Research.

This was the seventh week of inflows, in which a total of $1.051 billion has entered the market. The previous week had inflows of $163 million.

Inflows are $1.336 billion year-to-date, which is 8.35% of the funds' beginning-of-year total assets.

Global bond funds had inflows of $503 million in the week. These funds have had $9.158 billion of inflows year-to-date.

Bankruptcy reform in Brazil

In Brazil, the congress passed a bankruptcy reform law Wednesday. The bill was first proposed in 1993. The previous law gave importance to workers, tax revenue and creditors in that order. The new law, which took 11 years to come to fruition, gives priority to creditor and limits payments to workers.

Also, Brazil increased the minimum wage to R$300 from R$250 a month, a 15% increase.

"Yesterday [Wednesday], we saw a very strong day. The reforms passed by the Congress in Brazil were very optimistic. Also, the increase in the minimum wage was taken by the market in a neutral way," said the Refco strategist.

"Basically, the market expects that the government will be able to meet its primary surplus for 2005."

Colombia's pension plan

Colombia passed a pension reform bill this week, in hopes of reining in costly social security system. Senators voted to eliminate certain benefits and increase the retirement age to 62 for men and 57 for women.

Meanwhile, during Thursday's session, the peso jumped to its highest level in two years.

"The currency has been appreciating quite dramatically in relationship to the [U.S] dollar. And in effort to avoid further appreciation of the peso and to somehow give up the local pressures to the exporters, there were capital controls on short-term inflows of dollars into the market," said the Refco strategist.

Now the market in Colombia has turned its attention to Central Bank's monetary meeting on Friday, where the benchmark interest rate is expected to be left untouched at 6¾%, he said.

"We saw Colombia going higher and lower. We saw it close a quarter of a point to half a point lower," he noted.

The Colombia bond due 2012 lost 0.55 to 114.20 bid.

Malaysia's upgrade

Moody's Investors Service said it upgraded Malaysia's foreign currency ratings to A3 from Baa1.

Moody's said the upgrades reflected the continued strengthening of Malaysia's external financial position and the resultant lessened vulnerability to shocks.

According to a market source, the country will be taken off the JP Morgan EMBI+ Index but will remain in the EMBI Global index.

And after market close, it was announced that European Union leaders will start membership talks with Turkey on Oct. 3, 2005. The leaders cautioned that membership was not a guarantee.

During Thursday's session, Turkey's bond due 2030 added ¾ of a point to 142¾ bid.

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