Emerging Debt-Rises slightly during and after Powell address

www.forbes.com Reuters, 02.05.03, 12:56 PM ET

NEW YORK, Feb 5 (Reuters) - Emerging market sovereign bond prices traded slightly higher on Wednesday in a muted reaction to U.S. Secretary of State's Colin Powell's presentation to the United Nations in which he outlined the case for a possible war against Iraq. Benchmark Brazil C bonds <BRAZILC=RR> edged higher as Powell argued that Iraq had lied about its weapons programs while flouting U.N. demands that it disarm. "Most of us are still watching," said Mark Siegel, managing director at David L. Babson & Co., a member of the MassMutual Financial Group, explaining the lack of strong market reaction. "It remains to be seen how much of the risk that will come with the initiation of hostilities is priced in," Siegel said. "My guess is that the market will be shaken out of its complacency in the weeks to come and prices will go down." The market is concerned that a U.S.-led war against Iraq would jar the world financial system and spook investors away from risky assets, such as emerging market bonds. Emerging market bond spreads tightened by 10 basis points to 725 over U.S. Treasuries, according to JP Morgan's Emerging Markets Bond Index Plus. Tighter spreads reflect the perception of decreased risk as measured against safe-haven U.S. Treasury bonds. By early afternoon, C bonds had risen 3/8 to bid 69-1/4. While Powell played tapes and showed satellite pictures which he said proved that Iraq was concealing banned weapons, traders took a break from wondering about the policies of Brazil's new government, Venezuela's economically crippling oil sector strike and Argentina's financial recovery effort. "It's just Powell, for the moment," said Paul Masco, head of emerging market trading at Salomon Smith Barney. "It's the only thing going on today that matters."