Emerging debt-Prices up on rate hopes, Brazil rating optimism

Thu Feb 21, 2008 5:41pm EST
By Walter Brandimarte
NEW YORK, Feb 21 (Reuters) - Emerging sovereign debt prices rose on Thursday on hopes the U.S. Federal Reserve will further cut interest rates to support the world's largest economy, boosting the appetite for higher-yielding assets as a result.
But the rise in prices was not enough to avoid a widening in yield spreads over U.S. Treasuries, considered an important measure of risk aversion.
Spreads widened 9 basis points on the benchmark JP Morgan EMBI+ index 11EMJ, as investors rushed from U.S. stocks to the relative safety of Treasuries, causing the biggest daily drop in long-dated Treasuries yields in a month.
Expectations of more U.S. rate cuts were boosted by news that the U.S. Mid-Atlantic factory production slumped this month to its lowest level since the last recession.
Overall emerging debt returns still climbed 0.23 percent, according to the EMBI+, with Brazil's bonds jumping 0.5 percent on the index on speculation that ratings agencies might be close to upgrading the country to investment grade.
Expectations of an upgrade grew after the Brazilian central bank said the country became a net foreign creditor in January, when dollar-denominated assets exceeded liabilities by more than $4 billion. For details, see [ID:nN21471119].
"Investors bet that (the news) could trigger a 2008 upgrade to investment grade," RBC Capital Markets' analysts wrote in a report, noting that the Brazilian real BRBY also closed at its strongest level since May 1999 after the news.
Talking to journalists in Rio de Janeiro, Brazil's Finance Minister Guido Mantega said investors are already pricing in an expected upgrade of Brazil's ratings this year.
Brazil's global bond due 2040 , the most liquid emerging market paper, jumped 0.563 point in price to be bid 132.563, after five straight session of losses.
Ecuador's debt returns soared 1.03 percent on the EMBI+ after Finance Minister Fausto Ortiz told Reuters the country has no plans to restructure its foreign debt this year. [ID:nN21491191]
President Rafael Correa had spooked markets last year when he took over with vows to restructure the country's debt, which he often dubbed "illegal."
Argentina's bonds underperformed the market, on the other hand, after Fitch warned the country may encounter difficulties in refinancing its debt if market conditions deteriorate sharply. [ID:nWNA2650]
The agency reaffirmed its "B" rating on Argentina's local-currency debt, however, and repeated it would remove its "Restrictive Default" rating on the country's foreign-currency bonds if the government were to open a new exchange offer for holdouts of the 2005 debt restructuring.
Latin American stocks also showed resilience to a fall of more than 1 percent seen in the main U.S. equity indexes. The Morgan Stanley Capital International stock index for the region .MILA00000PUS gained 0.91 percent, as high commodity prices supported bourses in the region.
"Most people expected and so far have got it right that emerging markets would outperform core markets, on the credit side particularly," said David Spegel, global head of emerging markets debt strategy at ING in New York.
"In that regard, high commodity prices just add to the expectation that EM credits and companies and fundamentals are much more resilient than they used to be," he added. (Editing by Jan Paschal)