Brazil bonds rise on surprise rate cut; Hutchison finishes better despite mixed earnings picture

By Reshmi Basu and Paul A. Harris

New York, March 18 - Brazil's surprise interest rate cut bolstered the country's bonds in trading Thursday.

Brazilian C bonds closed at 97.75 bid, up 0.375 on the day. And Brazil's bond due 2040 closed out at 108.60 bid, 109 offered, up one point on the bid sid.

"The news was a symbolic gesture that the government will loosen control of the tight fiscal policy," said a trader. "Some good news is finally coming out of Brazil."

Brazil's central bank late Wednesday cut its benchmark lending rate 25 basis points to 16.25%, the first reduction time this year.

"In light of recent indications of reduced risk that inflation will deviate from the target, the Copom decided by six votes to three to cut the Selic rate to 16.25%, with no bias," the central bank said in a news release announcing the decision, made at its regular monthly meeting.

The cuts come at time of intense criticism of Central Bank president Henrique Mierelles's monetary austerity, according to a report by Christian Stracke of CreditSights, a research firm.

But investors have to question whether monetary policy is being dictated by political concerns, Stracke wrote.

Another concern is that Brazil's capital inflows have dried up and Brazilians have accelerated their transfers of flight capital. Stracke warned that investors should keep their eyes on Brazil's balance of payment data in the upcoming weeks.

Looking ahead at the prospects for Brazilian debt, the country must compete with news of formidable corporate issuances from Indonesia, Russia, Korea, India and the Ukraine.

CreditSights calculates there will be $23.04 billion of issuance through the end of May.

"We have to wonder whether there is enough appetite left for the $23 billion of potential new issues in the pipeline. Continued low U.S. rates will help, of course, but whether low global rates will be enough to help create some space for Brazilian debt issuance remains to be seen," wrote Stracke.

Hutchison gyrates but gains

Hong Kong telecommunications firm Hutchison Whampoa had another day of rocky trading as the company reported less than desirable profits - but still finished stronger on the session, according to a source.

The company reported its net profit for 2003 as a whole was HK$14.38 billion, compared with HK$14.36 billion a year earlier.

In trading, spreads on Hutchison Whampoa's bonds were tighter on initial reaction to the earnings report and then selling followed as market took in the higher losses at its 3G phone businesses.

But its liquid issues still managed gains of five to 11 basis points on the day.

Hutchison Whampoa 6¼% bond due 2014 finished 10 basis points better at 202 bps bid, 197 bps offered. Its 5.45% bond due 2010 gained 5 bps to 213 bps bid, 208 bps offered. And the 7.45% bond due 2033 closed the session 11 bps tighter at 242 bps bid, 237 bps offer.

The issues have been volatile all week in anticipation of the earnings release and on Wednesday its debt widened as much as 10 bps before rallying, then drifting wider into the close.

Mexico's assassination attempt

Elsewhere Thursday, Mexico's bonds were hit hard initially on the news of an attempted shooting of Jose Murat, governor of the southern state of Oaxaco but subsequently bounced back.

"The spreads were wider from the news, but then things calmed down," said a trader

"I don't think it's reacting at all to an assassination attempt that wasn't successful," another trader added. "It was a PRI guy, a governor of a not-very-large state. And this is a common occurrence.

"The market may have initially taken that news negatively. But in the end it does not appear to have had too negative an impact.

"The Mexican peso has only weakened by one centavo, so no one really took it seriously," the trader noted. The currency traded between 1094 and 1102 and closed at 1097.5. "So it's not a big deal," he said.

April roars ahead, trader says

The relative clam this week is set to shift into high gear as April approaches, according to a trader.

"The market has been quiet this week. It's been grinding higher but not exceptionally higher," he said. "It's been fairly benign."

But all will change in April.

"The expectation is that it will grind higher as we approach the end of the month because April is a large amortization month. There are a lot of maturities, especially the Brazil 2004, which is $4 billion right there.

"I believe the total amortization is over $6 billion for the month of April, alone. In theory that money has to be reinvested."

But little upside seen

But another market source was staying cautious despite the pullback in spreads earlier in the year.

"A year ago we were at almost 700 [basis points spread on the EMBI index]. Six months before that we were at around 1,000.

"We had a big correction in January and February. Things were pretty rough.

"Since then things have tightened slightly", said the source.

"In February we got as wide on the EMBI as about 458. Right now we're about 444. That's a pretty narrow range since the middle of February," he added.

"I think levels are still relatively rich. But fundamentals are still pretty good. There does not seem to be a catalyst to widen spreads in the short term. At the same time, however, I'm underweight. I'm more selective and more cautious and I am focusing on the stories that make more sense."

"EM seems to be correctly priced," a trader said.

"It can't get much higher because I don't think anyone wants to take the risk premium at tighter spreads. But it can't trade much lower because it would be regarded as too cheap and you would probably find better buyers."

Korea dominates pipeline

In new issuance, South Korea is dominating the issuance pipeline - with other countries quiet by comparison, according to an informed source.

"There is a long list of Korean names but I don't see anything coming from elsewhere," said the source.

"I have never seen this much Korean issuance at one time before.

"I think the line of thinking is that if one guy can get a deal done they all become confident that they can price deals."

Adding to the pipeline, Korea's largest cell phone operator SK Telecom is planning to start a roadshow for its $300 million offering of seven-year senior unsecured notes (A3/A-) on March 22, according to a market source.

Marketing starts in Singapore and Hong Kong on the first day, followed by New York on March 23 and Boston on the 24th.

Pricing is expected after the completion of the roadshow.

Credit Suisse First Boston and Citigroup are running the books on the Rule 144A/ Regulation S deal.

In other emerging market news, Russia's Alfa Bank delayed its planned three-year deal (Ba2/B/B+).

UBS Investment Bank and Merrill Lynch & Co. were to have been the bookrunners for the Regulation S issue.

And Energorynok, the Ukraine's state-owned power company, is reported to be considering the launch of its debut international bond deal in the second quarter of 2004, according to a market source.

The company is expected to offer $300 million of five- or seven-year non-callable paper, via JP Morgan.

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