Emerging market debt sees strong returns on Treasuries rally; Venezuela to sell local bonds

By Reshmi Basu and Paul A. Harris

New York, July 28 - Emerging market debt posted a strong showing Thursday as U.S. Treasury yields compressed. The market also gained traction from what appears to be a three-day break in the brewing corruption scandal in Brazil.

"It's all related to Brazil with some additional support from Treasuries," said Enrique Alvarez, Latin America debt strategist for IDEAglobal.

On the Brazilian front, the political tensions are decreasing, which is allowing it to build some strength, said Alvarez.

Investors are concerned that president Luiz Inácio Lula da Silva will be implicated in the continuing investigations of the postal authority and the votes for bribes scandal.

"You are seeing a very strong Bovespa today [Thursday], up 2.84%. And also some strength in the currency, so that in turn is flowing back into support for external debt," replied Alvarez.

With no developments in the scandal, Brazilian paper flourished in secondary trading. The bond due 2040 added 1.63 points to 117.85 bid.

"The market was strong today [Thursday]," said a trader, who added, "prices were up across the board."

He said that spreads were tighter, boosted by the rally in U.S. Treasuries. By the end of trading, the yield on the 10-year note stood at 4.17% from Wednesday's 4.24%.

The trader described volume as "okay." And he said that there were a variety of players, "managers, local accounts, dealers, everybody."

Also ticking higher in trading, the Russia bond due 2030 was up 0.499 to 110.927 bid. The Turkey bond due 2030 gained 1¼ points to 142¼ bid. The Venezuela bond due 2027 gained 0.85 to 104.40 bid.

Meanwhile Alvarez does not sense that there is a lot of local buying in Brazil.

"Locals tend to be a lot more nervous in these type of situations."

Alvarez added that even though Brazil's domestic equity market and currency market are showing more confidence, there is no real indication that locals are buying external debt.

"But I see there is a clear opportunity here for speculators and fast money-type crowds.

"A large portion is going to be cautious or short. And it's easy to get squeezed in this type of environment."

The sustainability of the rally will depend on the impact Friday's U.S. GDP numbers have on the Treasury market, said Alvarez.

And down the road, market stability will fringe on what develops in testimony over the Brazilian postal scandal, he added.

Xinao, Chartered set talk

Meanwhile in primary action, Beijing-based Xinao Gas Holdings Ltd. talked its $150 million offering of seven-year senior unsecured notes (Ba1/BB+) at 7 3/8% to 7½%.

Pricing is expected on Friday.

Deutsche Bank is the bookrunner for the Regulation S offering.

Also, Milpitas, Calif.-based Chartered Semiconductor Manufacturing set price talk for an upsized offering of $625 million in five-year and 10-year senior notes (Baa3/BBB-) Thursday.

Talk for the $375 million portion of five-year notes was set at 190 basis points more than Treasuries.

Meanwhile talk for the $250 million tranche of the 10-year notes was set at 230 basis points more than Treasuries.

The issue, increased from $450 million, is expected to price on Friday.

Goldman Sachs (Singapore) Pte. is the global coordinator for the Securities and Exchange Commission-registered offering. Citigroup and Goldman Sachs (Singapore) Pte. are joint bookrunners.

Venezuela to sell Bolivar issue

In the coming 10 days the government of Venezuela plans to address an excess of liquidity in its financial system with new issuance amounting to $1.5 billion equivalent, according to market sources.

One source told Prospect News on Thursday that a local Bolivar-denominated issue is the most likely scenario.

The source said that the government, in this scenario, could be expected to offer a mixture of bonds with different yields and maturities.

The mix would likely include indexed bonds pegged to the official exchange rate of VEB 2.15 bolivars to the dollar, the source added.

ABN Amro and Calyon Securities are expected to be involved.

The source said that the government believes the issuance will help to drain liquidity from Venezuela's financial system which has been increasing in spite of the central bank's tighter monetary policy.

Further liquidity is expected when money from social spending programs initiated by President Hugo Chavez starts to work its way into the system, the source added.

Meanwhile expected bond deals from three Macau-based gaming operations are likely to receive warmer receptions from traditional high-yield accounts than from emerging markets names, according to an emerging markets trader who focuses on high-yielding Asian names.

The three deals, all of which are expected in the fourth quarter of 2005 include:

* K. Wah Construction Materials Ltd., the owner of Macau's Galaxy Casino, with $800 million via Merrill Lynch & Co. and Morgan Stanley;

* Wynn Resorts (Macau) SA with $744 million equivalent via Banc of America Securities and Deutsche Bank Securities; and

* Venetian Macau Ltd.'s with $300 million - possibly structured as a floating-rate note - via Goldman Sachs.

A U.S. high yield syndicate official commented Thursday that the three deals are on the "shadow calendar," and that none are expected to launch prior to September.

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