Emerging market spreads tighten on Brazil's minimum wage victory, Southern Bank prices

By Reshmi Basu and Paul A. Harris

New York, June 23 - Emerging market debt traded higher in light volume Wednesday, lifted by a win for Brazilian president Luiz Inacio Lula da Silva in the fight over the country's minimum wage.

Meanwhile in primary action, Malaysia's Southern Bank Bhd. priced $200 million of 10-year subordinated notes (Baa3//BBB-) at 99.028 to yield Treasuries plus 243.5 basis points or 6.355%.

"The book was oversubscribed," said a source.

The deal priced in line with price guidance. The offering had been talked at Treasuries plus 240 to 245 basis points.

Goldman Sachs ran the books for the Regulation S deal from Malaysia's ninth largest bank.

Also in primary action Wednesday, Bahrain priced $250 million of floating-rate notes at par to yield six-month Libor plus 45 basis points. Citigroup was bookrunner.

MISC, TPSA talk

Price talk was heard for two upcoming corporate deals.

Malaysia International Shipping Corp. set price guidance for its two-tranche senior $1 billion unsecured bond (Baa2/BB+) offering. Guidance is Treasuries plus 125 to 135 basis points for the five-year notes and Treasuries plus 150 to 160 basis points for the 10-year notes.

One source said the proposed issue should do well because of Malaysia International Shipping's ties to Petronas, which owns 62.44% of the shipping company.

Barclays Capital and Citigroup are running the Rule 144A/Regulation S deal.

From Poland, TPSA Eurofinance SA, a financing subsidiary of Telekomunikacja Polska SA, released talk of mid-swaps plus 65 to 70 basis points on its planned minimum €300 million offering of seven-year bonds.

BNP Paribas and Deutsche Bank Securities are running the books on the deal.

Both Malaysia International Shipping and Telekomunikacja Polska are expected to price Friday.

Brazil firmer on Lula's wage victory

A day after the release of ratings showing Lula's popularity rating was down sharply, the lower house of Congress in Brazil voted for a modest 8% increase to the minimum wage to 260 reais from the current 240 reais, a victory for the beleaguered president.

The lower house rejected the bigger increase to 275 reais demanded by the opposition and passed by the Senate last week.

However, Lula could not relish the victory on his home turf. He was at an investor meeting in New York, where he emphasized his commitment to maintaining long-term economic growth rather than putting his country on a faster economic expansion track.

"I'd prefer Brazil grow less but in a sustainable way," Lula told investors.

A poll released on Tuesday showed Lula's approval rating fell to 54% in June from 60% in May, sparked by the Latin American nation's unemployment rate.

"The market slowly drifted higher, led by Brazil," said Enrique Alvarez, Latin American debt strategist for IDEAglobal, a research firm, describing trading Wednesday.

Overall, volume was thin as emerging market paper firmed up. Lula's victory was a positive for the market, said Alvarez.

"Other than that, you have a very much wait and see attitude. Carrying trades are waiting for the Fed to act.

"The market has been positive on the day but there hasn't been either a great deal of volatility or a great deal of volume," added Alvarez.

One trader said there was a little bit of selling in the morning and then bonds rallied in the afternoon.

"The market closed in a pretty good tone," said the trader. "We saw the EMBI tighten by seven basis points, led by Brazil, which tightened by 22 basis points.

The Brazil sovereign bond due 2040 ended up at 93.80 bid, 94 offered, added the trader.

One of the countries that did not benefit from the rally was Russia, which saw some selling in the afternoon, said the trader.

The Russian benchmark bond due 2030 was unchanged on the day at 92.625 bid.

The trader also noted gains elsewhere.

"Argentina tightened by 22 basis points," the trader said. "Venezuela tightened by 19 basis points, Peru tightened by 20 basis points."

Aside from Russia, the only country that did not tighten was South Africa.

"I think investors were looking for some yield elsewhere because there was pretty good news coming out of South Africa," noted the trader.

Treasuries rallied during Wednesday's session. The 10-year note's yield went down to 4.7%. The five-year was at 3.906%.

Peru's curious trading day

There has been some curious action in Peru, according to IDEAglobal's Alvarez.

The bonds have moved up a point and the offers are pretty wide, a puzzling phenomenon, said Alvarez.

"But there hasn't been any real news out of the local market, nor anything noteworthy other than the fact that they signed the mining royalties law into effect as is. But that's really old news."

The new legislation will change that law and make royalty payments depend on the price of the minerals and not on the size of the companies or their sale.

"I don't know if they are due to issue anything or if there is a rumor out there regarding issuance," said Alvarez.

"It would be interesting to see because it had a peculiar performance this afternoon."

The Peru bond due 2033 was up half a point to 88 bid. And the bond due 2016 was up a point to 99 ¼ bid.

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