Emerging debt market seen taking profits

Sun Jul 25, 2004
By Greg Brosnan

NEW YORK, July 25 (Reuters) - Analysts expect profit-taking to end July's emerging market bond rally this week as investors price in a string of U.S. interest rate hikes expected this year following bullish talk from U.S. Federal Reserve Chairman Alan Greenspan.

"We have had a very good run, we think it's a good time to take some profits," said Alberto Bernal, head of Latin America Research for IDEAglobal.

Total returns on the JP Morgan Emerging Market Bond Index Plus EMBI+ (11EMJ: Quote, Profile, Research) have risen 2.7 percent in July as investors leapt on some soft U.S. economic data taken as a sign interest rates could stay put or rise more slowly than expected.

Lower yields on safe-haven U.S. Treasury notes, which accompany lower U.S. interest rates, prompt investors to seek extra yield in riskier assets like emerging sovereign bonds, supporting their price.

But the market took upbeat comments on the U.S. economy last week from Greenspan as a sign the Fed will likely continue raising U.S. rates gradually.

"U.S. rates will go up, and when you have U.S. rates going up ....you need to have an adjustment on the price of (emerging market) bonds," said Bernal. "That implies Latin American (sovereign debt prices) will suffer.

With emerging debt investors concerned about the impact of changing U.S. interest rates on their bonds, the analysts that advise them have recently spent most of their time gauging how quickly the U.S. economy is recovering and whether there is a risk of inflation.

Rising inflation would likely prompt the Federal Reserve to speed up the pace of interest rate hikes to cool an overheating economy -- a disaster scenario for emerging debt prices.

This week emerging market focus will be on U.S. new home sales data for June and consumer confidence data for July, both set for release on Tuesday, and U.S. economic growth numbers for the second quarter of 2004, due on Friday.

The market will also be watching to see how Brazil debt prices open on Monday. They fell on Friday after a local magazine accused Central Bank President Henrique Meirelles of tax evasion, a charge he denied the same day.

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