Emerging market spreads pierce new record low; Brazil adds $500 million to 2017 bonds

By Reshmi Basu and Paul Deckelman

New York, April 3 - Spreads for emerging market debt shrank to a new record low Tuesday, bolstered by investors' hunger for high beta credits, particularly Brazilian external debt.

In the primary market, Brazil reopened its 6% fixed-rate bonds (Ba2/BB/BB) due 2017 to add $500 million, taking advantage of the lack of new sovereign issues.

The reopening priced at 100.796 to yield 122 basis points more than Treasuries or a yield of 5.888%.

Merrill Lynch and Morgan Stanley were bookrunners for the offering of Securities and Exchange Commission-registered bonds. Banco Itau Europa SA and BB Securities were co-managers.

In November 2006, the country sold $1.5 billion of the bonds at 99.125 to yield a spread of 159 basis points over Treasuries or a yield of 6.249%. With the additional bonds, the total size of the deal stands at $2 billion.

Furthermore, Brazil said it reserves the right to sell an additional $25 million to Asian investors on Wednesday.

"It's a very tiny re-opening," remarked Enrique Alvarez, Latin America debt strategist for think tank IDEAglobal.

"It's sort of in the middle of the curve and there should be significant appetite for that kind of paper. If you look at the current 2017 issue, it's basically trading unchanged on the day," he added.

From a technical stand point, that means the new supply did not weigh on the issue, a definite positive for the country.

In trading, the 2017 bonds were spotted at 101.20 bid, 101.30 offered, up 0.10 from the previous session.

KT issues new debt

Meanwhile South Korean fixed-line and Internet service provider KT Corp. sold a $200 million issue of five-year notes (A3/A-) at 99.374 to yield a spread of Treasuries plus 72 basis points.

Citigroup and Goldman Sachs were the lead managers for the Regulation S offering.

EM hits new low

Back to the secondary market, it appears as if appetite for risky assets has bounced back following February's turbulence. During the session, the spread on the JP Morgan EMBI+ index narrowed by 2 basis points to 163 basis points versus U.S. Treasuries, a new record low.

"I think it's a Brazil-led grind," noted Alvarez.

"I absolutely believe there is insatiable appetite for Brazilian risk at this point in time," he said.

One only needs to look at current bond prices and spread levels to confirm that outlook, he added. For example, the Brazilian bond due 2034 has been pushing inside of 140 bps on the bid side, trading at historical levels and also marking an impressive feat for the country.

EM in favor as Iran tensions ease

Up until now, investors in Latin American credits have been more defensive on the escalation of tension between the West and Iran. But recent diplomatic moves appeared to have eased the tension between Britain and Iran over the captivity over British naval personnel, which allowed investors to add risk.

All in all, everything seems back on track as the market is now trading at levels seen prior to the sell off which occurred in late February, according to market sources.

"It seems to be now if oil goes up, everything is okay. If oil goes down, it's very okay," opined Alvarez, adding that this echoed last year's market psychology when oil topped $78 per barrel. The sentiment turned negative on inflationary worries, but then changed course on excess liquidity.

"The market continues to see positives at every turn in the external environment and is very unwilling to part ways with any current holdings," he said, adding that credit and country risk have taken a backseat in terms of being price drivers to headlines from the external side.

Asia, Latin America well bid

Meanwhile Asian and Latin American benchmark names were well bid Tuesday, although volume was relatively light amid an abbreviated trading week.

During the session, the bellwether Brazilian bond due 2040 gained 0.15 to 135 bid. 135.05 offered.

In other moves, good economic data lifted Turkey's debt as the country's economy grew 6.1%, exceeding expectations.

In trading, the Turkish bond due 2030 added 0.50 to 154.125 bid, 154.625 offered.

In other developments, Ecuador's president Rafael Correa did not make any specific references to the country's debt restructuring plans during his speech Monday night, which outlined his economic agenda. He did reiterate that restructuring was a priority, but it was not the focus of his speech, according to market source.

Instead, he said he wanted increased spending on the poor and criticized dollarization. Moreover, many market participants believe that any movement on the debt restructuring will not take place until 2008.

Year-to-date, Ecuador has been crowned the best market performer as well as for the month of March.

Within the current environment, investors are forced to look at the only credit that trades outside of the 200 to 225 basis point range within the full Latin American spectrum, commented Alvarez. And that only credit is Ecuador.

"I think there's a self-supported motive there for the credit to be so strong," he noted.

In trading, the Ecuadorian bond due 2030 was unchanged at 89 bid, 89.50 offered.

Elsewhere, Ukrainian's external debt sold off on the decision by president Viktor Yushchenko to dissolve parliament.

During the session, the country's bond due 2013 gave up 0.75 to 107.50 bid, 108 offered.

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