Emerging market debt jittery on lower core markets

By Reshmi Basu

New York, June 19 - Emerging market debt was skittish Monday in light trading volumes as the asset class tracked U.S. core financial markets lower.

U.S. equities and U.S. Treasuries slipped as inflationary worries toppled the markets once again.

Since mid-May, risk aversion for emerging markets has been on the upswing on the back of inflationary jitters in the United States. Local markets have been more susceptible to the volatility, but sovereign debt has not been immune to the selling pressure.

Last Friday, emerging market debt ended a two-day rally as U.S. stocks lost momentum.

The negative tone carried into Monday's session as core financial markets gave back early morning gains on the prospect of slower economic growth, lower commodity prices, and comments made by a Fed official.

Leading up to the Federal Open Market committee meeting on June 29, investors have been perusing U.S. economic data for clues as to how the FOMC will vote.

Since this week is a relatively light week in terms of economic data, it is unlikely to do anything to change the markets' conclusion that the Fed will raise rates, according to a market source.

The market is now pricing in a 25 basis points hike to 5¼%.

But now many believe that the FOMC will raise rates beyond its June meeting.

Adding to the consternation in the market Monday, Federal Reserve President Jack Guynn noted that core inflation had moved beyond the Fed's comfort zone in a speech to the Georgia Bankers Association convention.

The sell-off in U.S. Treasuries pressed equities to give up gains, according to Enrique Alvarez, Latin America debt strategist at research firm IDEAglobal.

At session's end, the Dow Jones Industrial Average index was down 72.44 to 10,942.11 while the yield on the 10-year Treasury pierced 5.14% from 5.12% late Friday.

"As equities went, so did Latam," observed Alvarez.

"It wasn't really a large amount of selling. Volumes are very limited - sort of World Cup trading," he noted.

As emerging market debt followed equities lower, high beta names took the blunt of the downturn. Overall the external debt market saw spreads tighten by two basis points. The JP Morgan EMBI Global index was down by 0.2%.

For the session, Argentina and Ecuador were among the worst performers, noted a trader.

The Argentinean discount bond due 2033 slipped 1.10 to 92.50 bid, 93 offered. The Ecuadorian bond due 2030 gave up 0.65 to 97.50 bid, 98.35 offered.

Over in Brazil, the long end of the curve saw the worst of the sell off. During the session, the bellwether Brazilian bond due 2040 was down 0.90 to 122.60 bid, 122.85 offered.

Meanwhile Mexican bonds tracked U.S. Treasuries lower. The country's bond due 2026 shed 1.25 to 146 bid, 147.25 offered.

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