Tue Jul 20, 2004
By Greg Brosnan

NEW YORK, July 19 (Reuters) - Emerging sovereign bond prices fell on Tuesday after Federal Reserve Chairman Alan Greenspan's optimism over the U.S. economy led investors to worry U.S. interest hikes could come at a brisker pace.

The JP Morgan Emerging Markets Bond Index Plus (11EMJ: Quote, Profile, Research) fell 0.76 percent in total returns, while spreads narrowed by two basis points.

Speaking before the Senate Banking Committee, the Fed chief said the U.S. economy had entered a self-sustainable expansion that was generating some price increases, but not enough to to threaten the recovery.

The most recent batch of data had shown that the U.S. economy was still growing at a fairly strong rate, although some key indicators pointed to weakening consumer spending and a slowdown in job creation.

That had led to a rally in emerging market bond prices as some investors pondered whether the Fed would need to raise interest rates at all in its next meeting on Aug. 10.

Lower U.S. interest rates keep yields low on U.S. Treasuries, considered the world's safest bonds. That supports emerging bond prices as investors seek yield in riskier paper.

"We went up because of the economic data last week that suggested U.S. interest rates could be lower," said Christian Stracke, lead emerging markets analyst at Wall Street research firm CreditSights.

"Greenspan essentially said "We're staying on target, the economy might have had a little bit of a hiccup but in general it's on a path to recovery,'" said Stracke. "I think it is fairly strong statement."

Others in the market were more bullish on emerging market debt, refusing to rule out a continuing rally.

"I'm not sure that (Greenspan) said anything new," said Hari Hariharan, chairman of NWI management, a fund that manages about $1 billion in emerging market debt.

"Perhaps you could say it's a little more hawkish and more positive given how weak recent numbers have been," he said. "In a couple of days it should settle down."

If the rally does continue, though, some say it could cancel itself out as higher prices beckon more borrowers to issue new bonds, leading to oversupply.

"The macro view of this market is that ... eventually the supply of new paper imported to the market is going to catch up with demand," said Stracke.

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