Emerging market debt in narrow range ahead of Fed, jobs data; Brazil sells upsized $1.25 billion global

By Reshmi Basu and Paul A. Harris

New York, Jan. 31 - Emerging market debt traded in narrow ranges Monday ahead of the Federal Reserve meeting on Tuesday and Wednesday while Brazil hit the primary market with an upsized $1.25 billion offering of 20-year global bonds.

Less than two weeks after tapping the euro market, the Federative Republic of Brazil priced its upsized $1.25 billion of 20-year bonds at 98.61 to yield 8.90%.

Deutsche Bank and UBS ran the global bond sale.

The new sovereign was increased from $1 billion because of strong demand, according to a market source.

"The bonds have been trading well," said a sellside source. "It was fairly priced to what they have outstanding."

The new supply did little to spook the secondary market. During Monday's session, the bond due 2040 added 0.30 to 115 ½ bid.

Brazil joined the line of recent issuers, who have tapped the long-end of the curve.

"January is usually the month when demand for new paper is high and issuers are able to tap the market with long-dated deals, and this year is no exception," said an emerging market analyst.

Last week, the Philippines priced an upsized $1.5 billion of 25-year bonds at 98.131 to yield 9.70%. And Peru added $400 million in the reopening of its global bonds due November 2033 (Ba3/BB/BB).

"The weighted average tenor of issuance this month has been 13.2 years, which is high but is actually down a little from 14.6 years in issuance in January 2004," he said.

"From the issuers' perspective, the longer the tenor the better, so as long as the demand is there you can expect the issuers to issue as far out on the curve as the market will take.

"What is interesting about this year, though, is that there haven't been any 30-year deals so far. Last year, we had major 30-year benchmark deals from Turkey, Venezuela, Brazil, CVRD and Panama.

"Because of those deals, the 30-year sector is still a little crowded. Peru has been the exception, but it was only able to tap the already existing 33s," he added.

"I think Brazil sticking to a 20-year maturity is probably smart - it shows that it can bring a relatively long-dated deal to market, but it doesn't push the market too hard with a 30-year deal."

Mexico gains on S&P upgrade

Mexico's debt posted small gains after Standard & Poor's lifted its long-term foreign currency sovereign credit rating for the country to BBB from BBB-. The rating agency said the upgrade was a result of the country's increasing macroeconomic stability. The upgrade also put it one notch below Moody's rating on that same credit. Moody's has the credit at Baa1 while Fitch rates it BBB-.

"They have very different ratings from every agency," said the sellside source. "But their bonds are having a small rally. Market already expected this."

In secondary trading, the longer part of the curve fared well. The bond due 2026 gained 1.3 to 156.45 while the bond due 2031 was up 1.45 to 121¼ bid. The Mexico bond due 2007 fell 0.10 to 111.55 bid.

"That part of the [long] curve has been underperforming in the last few days. The volumes are up and people are getting into trading, especially at that part of the curve because it has been underperforming."

Colombia also saw a surge in prices Monday, said the sellside source.

"Most of the bonds are between 15 cents and 1½ dollars are up," he said.

"On a spread basis, they are tighter around 10 to 15 basis points."

The Colombia bond due 2020 rose three quarters of a point to 126½ bid.

"Spreads have been somewhat rallying. 30-year [U.S.] Treasury had rallied 2.5 basis points from the close of Friday, so investors have to make up for that," noted the sellside source.

Other paper from Latin America was mixed in trading. The Ecuador bond due 2030 added half a point to 92½ bid. The Venezuela bond due 2027 was down 0.35 to 102½ bid.

In another development, Standard & Poor's said it raised its long-term foreign currency sovereign credit rating on Russia to BBB- from BB+.

The Russia bond due 2030 moved up 5/8 to 105 bid.

"Asia is trading flat," said a trader.

"The Philippine deal is a little quieter today [Monday]. It traded down a little bit in Asia, but has traded back up.

"Most of the other high-grade stuff is firmer."

Overall, the JP Morgan EMBI+ Index was up by 0.11% while its spread to Treasuries tightened two basis points to 367 basis points.

Looking ahead, investors are expected to be trading in narrow ranges this week ahead of Wednesday's decision by the Federal Reserve and Friday's release of non-farm payroll numbers.

"They [investors] are trying to get ahead and get some gains," said the sellside source.

Most likely, investors will be trading at the high end of the range until the payroll numbers come out "because they have to expect some volatility in Treasury rates," added the source.

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