| | |  Business News | September 2009 
LatAm Stocks Up, Mexico Holds Rates Steady
 Daniel Bases - Reuters
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September 19, 2009
 |  | A sell-off in U.S. Treasuries caused spreads to narrow with benchmark emerging market sovereign bonds. |  | | |
New York, - Emerging markets had a weak bias in light trading volumes on Friday as investors took a more cautious stance, considering the runup in prices as a good opportunity to book some profits.
Mexico's central bank left interest rate unchanged, but a statement that made reference to increased inflation threats left local bonds weaker and caused a spike in interest rate swaps.
At the same time however Mexico issued $1.75 billion in additional debt to a generally receptive international market. Corporate issuances continued to emerge from the pipeline with two deals priced at discounts, indicating the appetite for new issues is still not back to pre-crisis levels.
In the stock markets the MSCI Latin American stock index climbed back late in the day to a gain of 0.38 percent while the broader MSCI emerging markets stock index fell 0.11 percent. "I think there's a lack of conviction in the market."
"People are generally on the sidelines or taking some profits, not for bearish reasons but on valuations or technicals," said Paul Biszko, senior emerging markets analyst at RBC Capital Markets in Toronto. A sell-off in U.S. Treasuries caused spreads to narrow with benchmark emerging market sovereign bonds.
The JP Morgan Emerging Markets Bond Index Plus showed yield spreads narrower by 5 basis points to 316 basis points. Mexico sold $1.75 billion in new bonds, split between an additional $1 billion of existing 10-year debt and $750 million in existing 31-year debt.
Mexican homebuilder GEO sold $250 million worth of five year notes while Brazilian industrial conglomerate Voto-Votorantim sold $1 billion worth of 10-year notes.
CENTRAL BANK TALK
In Mexico, the central bank left interest rates unchanged at 4.5 percent for a second consecutive month while warning investors about an increased threat of inflation.
Analysts said they felt the statement from the central bank was fairly balanced. Nonetheless, yields on government debt and interest rate swaps rose on the news because of a fear that monetary policy might tighten sooner than expected. "All of the risk premium that is priced in is excessive at this point considering the (U.S. Federal Reserve) is not pricing in (interest rate) hikes until March of next year," said Siobhan Morden, fixed income strategist with RBS Securities in Greenwich, Connecticut.
"Mexico is pricing in rate hikes in January or February. The local rate sell-off is an overreaction. Mexico is not going to hike rates before the Fed," she said. Mexican one year TIIE interest rate swaps rose 9 basis points on the day, Morden said to 5.6682.
The government's benchmark 10-year peso bond rose 6 basis points to yield 8.14 percent following the central bank's monthly policy statement. Its price fell 0.389 of a point to bid 102.305. In Brazil, Central Bank Governor Henrique Meirelles said domestic markets are showing signs of euphoria which may not be justified even though the economy has recently rebounded from recession.
Meirelles, speaking with Reuters before the Group of 20 meeting in Pittsburgh next week, also said China and the United States hold the keys to fixing global economic imbalances. He added that the G20 group would outlast the worldwide crisis and that he would not make any sudden or drastic changes to its monetary reserves.
Brazil's real fell 0.17 percent to 1.8110 per U.S. dollar.
(Additional reporting by Reporting by Jason Lange and Michael O'Boyle in Mexico City, Raymond Colitt and Ana Nicolaci da Costa in Brasilia; Editing by Kenneth Barry)
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