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Sunday, May 27, 2007

(EXTRACT) SOURCE - REUTERS

Emerging debt cautious on China, U.S. Treasuries

By Walter Brandimarte

NEW YORK, May 27 (Reuters) - Emerging sovereign debt investors will likely start the week in a cautious mood, after the U.S. market holiday on Monday, watching the performance of Chinese stocks and the U.S. Treasury bond market.

Investors in riskier emerging market stocks and bonds were unnerved by comments last week by former Federal Reserve Chairman Alan Greenspan who suggested Chinese stocks were overvalued.

In addition, the rise in U.S. Treasury bond yields in the past week has attracted some investment flows out of emerging debt markets.

Overall the emerging debt market ended last week with losses of almost 0.5 percent for the week, according to the benchmark JP Morgan's EMBI+ index .

Yield spreads between emerging debt and U.S. Treasuries, a key gauge of risk aversion, ended at 152 basis points on Friday, only 1 basis point wider for the week, after hitting an all-time low of 149 basis points on Wednesday.

"My expectation for the week is positive because last Thursday's correction created some value in the market," said Ricardo Amorim, head of Latin America Research at WestLB in New York.

Amorim said, however, he is worried that another possible sell-off of Chinese stocks could spill over to other emerging markets, as it did earlier this year in February.

"When that happens, emerging markets may sell off a lot. Until then, they should keep their upward trend."

Analysts also fear that rising returns on U.S. Treasuries may spur a stronger sell-off in emerging markets, especially if yields on the benchmark 10-year notes keep climbing to a range between 4.9 percent and 5.0 percent. On Friday, the 10-year note yield was around 4.86 percent.

U.S. jobs and inflation data due to be reported in the coming week are also expected to make investors cautious.

The U.S. labor market has been strong with unemployment around 4.5 percent -- a six year low -- and inflation has been moderating in recent months, after crude oil and U.S. gasoline prices both reached record levels last year, but the Federal Reserve remains concerned about inflation.

The minutes of the Fed's latest monetary policy meeting, due to reported on Wednesday, will also be closely monitored by investors.

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