Emerging debt-Spreads narrow slightly, holidays limit trade

By Daniel Bases

NEW YORK, May 5 (Reuters) - Emerging market assets were slightly higher on Monday amid thin holiday trade as stronger-than-expected U.S. service sector data bolstered investor sentiment.

A rise in U.S. services sector activity for the first time in four months initially gave stocks a boost, caused U.S. Treasuries to drop and helped tighten credit spreads for emerging market sovereign bonds.

Yield spreads for the benchmark JP Morgan Emerging Markets Bond Index Plus 11EMJ.JPMEMBIPLUS narrowed by three basis points to 250 basis points over U.S. Treasuries.

But the gains in stocks faded quickly and U.S. Treasuries recouped much of their lost ground.

"Originally the services data resulted in spread compression because of the Treasury downside, but it really had no impact on sentiment whatsoever," said David Spegel, global head of emerging market strategy at ING in New York.

"Sentiment remains pretty good. If you look at the new issuance calendar it is pretty heavy. Generally, that is a positive sign," said Spegel.

Trading was thin with market holidays in London and Tokyo.

According to the ING data, Spegel said so far this year there remains $37.5 billion in sovereign emerging market bonds budgeted for issuance while corporate issuance in the area is roughly the same.

Spegel said much of the issuance on the corporate side is expected to come from companies based in the former Soviet Union rather than Latin America, which are relatively flush with cash.

Emerging market equities managed to hold onto gains even as U.S. stock markets dropped into negative territory. The Morgan Stanley Capital International emerging market stock index rose 0.28 percent on the day to 1,210.91, its best level in three and a half months.

ARGENTINA WEAK

The worst performer on the EMBI+ on Monday was Argentina, where spreads widened by one basis point to 549 and total returns on the day fell 1.51 percent versus a 0.11 percent decline for the index overall.

On Monday the Argentine government issued new regulations aimed at normalizing beef exports, a key demand of farmers locked in negotiations with officials over grain export taxes.

Farm strikes, which were suspended a month ago, have yielded little in the way of agreement and have led investors to stay away from the grain and beef exporter.

"It's not clear how the dispute will be resolved, with both sides seemingly digging their heels in, but at least they seem to be talking. If no progress is made in the next two days, however, and road blockages resume, expect local assets and the peso to come back under pressure," HSBC said in a research note.

Venezuela also saw yield spreads widen on Monday but total returns were off just 0.27 percent as the OPEC member has benefited from record high oil prices.

Oil rose more than $4 to a record high over $120 barrel on Monday due to a weaker U.S. dollar and supply concerns from OPEC members Nigeria and Iran. (For related story, click on [ID:nSYD170030])

Higher oil prices have helped insulate oil exporting emerging market countries such as Venezuela and Ecuador where government fiscal policies are not viewed favorably by international investors due to their populist spending proclivities.

GEORGIA OUTLOOK CUT

The credit rating outlook for the government of Georgia was revised lower by Standard & Poor's on Monday to stable from positive. The "B+" rating, four notches below investment grade, was affirmed by S&P.

The action was taken due to increased tensions with Russia over pro-Western Georgia's breakaway republics of Abkhazia and South Ossetia. (For related story, click on [ID:nN05534564])

Georgia, situated on Russia's southern border, next to the Black Sea, has had strained relations with Russia for more than a decade due to Moscow's support for Abkhazia and South Ossetia, which threw off Georgian rule in wars in the 1990s.

In an interview with Reuters on Monday, Georgian Prime Minister Lado Gurgenidze rejected Russian allegations that his country wanted conflict with Moscow and that it was not in Georgia's interest to destabilize its booming economy. (For related story, click on [ID:nL05158605])

Earlier, S&P said Indonesia, Sri Lanka and Vietnam could see their credit ratings hit if their governments fail to curb inflation and government expenditure. (Editing by Leslie Adler)