Emerging market spreads tighten despite Brazilian politics; Panama announces cash tender offer

By Reshmi Basu and Paul A. Harris

New York. Nov. 14 - Emerging market debt saw selling pressure Monday in response to political noise coming out of Brazil and a back up in U.S. Treasuries. Nonetheless, the market again showed resilience as spreads tightened for the day.

In the primary market, the Republic of Panama announced Monday a cash tender offer to buy $2.25 billion of its global bonds. Additionally, the country said it would issue global bonds due 2026 to finance the tender offer.

Out of Kazakhstan, Alliance Bank will price $200 million of five-year notes early Tuesday morning.

The size of the book is around $240 million, according to a source. Investors out of Asia make up 50% of the orders, followed by Europe with 40% and the United States with 10%.

Early last week, the issuer set price guidance at 9 1/8% to 9 3/8%. ABN Amro and Citigroup are managing the sale.

Also, JSC Bank TuranAlem set price guidance for a $200 million offering of three-year floating-rate notes (Baa2/BB-/BB) at Libor plus 175 basis points. The deal is coming via Credit Suisse First Boston.

Out of Asia, Korea Development Bank expects to price a quick-to-market $500 million offering of seven-year floating-rate notes with an interest rate in the Libor plus the high-20 basis points area to Libor plus the low-30 basis points area.

Pricing is expected on Tuesday.

Barclays Capital, Credit Suisse First Boston and Morgan Stanley are the underwriters.

Brazil lower on Palocci rumors

In trading Monday, Brazilian bonds moved lower on fears that the country's market-friendly finance minister would become the latest victim of the country's never-ending political scandal.

Antonio Palocci has been mired in allegations of illegal campaign financing for the president's Workers' Party. There is speculation that he will leave, which is raising concerns as to whether or not president Luiz Inacio Lula da Silva will be able to stay the course on fiscal discipline.

Sources told Prospect News there were worries that the next finance minister would be a big spender in order to help Lula lock in popular support for the 2006 election.

Aloizio Mercadante, a Workers' Party senator, has been rumored as Palocci's replacement. And he has been a critic of Palocci's economic policy.

In reaction to the ongoing developments, local investors reduced their long positions ahead of Tuesday's holiday in Brazil, according to a market source, adding that U.S. investors attempted to cover part of their short positions.

Additionally, a trader added that volumes were light.

In late trading, the Brazil bond due 2040 was spotted down 1.10 to 121.30 bid, 121.40 offered. The bond due 2008 fell half a point to 107 bid, 108 offered while the bond due 2014 dropped 0.85 to 117½ bid, 117¾ offered.

The spread on the Brazilian portion of the JP Morgan EMBI+ Index widened by four basis points to 353 basis points more than Treasuries.

Meanwhile, as Brazilian bonds followed political developments, other bonds tracked U.S. Treasuries, according to Enrique Alvarez, Latin America debt strategist for IDEAglobal.

"The Treasury has been weaker throughout the day, but we actually tightened," he added.

Treasury yields spiked higher ahead of this week's deluge of economic data.

At session's close, the yield on the 10-year note stood at 4.58%, up from Thursday's close of 4.55%.

But nonetheless, emerging markets appeared unfazed. One reason why the overall market held in in the face of slumping Treasuries is because the yield movement has been within "a highly defined range," noted Alvarez. Thin volumes also gave the market support.

More pressure is likely to come if the yield on the 10-year note pierces 4.67%/4.68, observed Alvarez.

Tuesday will see the release of New York-area factory data, the producer price index and retail sales. Next, the consumer price index and inventory data will come out on Wednesday. And housing starts, national industrial production and a Philadelphia-area business gauge will be released on Thursday.

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