Emerging market debt trades flat to lower; Brazil bonds instantly down on minimum wage defeat

By Reshmi Basu and Paul A. Harris

New York, June 18 - Emerging market debt gained against U.S. Treasuries Friday although selling towards the end of the session reversed some of the advance.

Volatile U.S. Treasury prices set a nervous tone for emerging market bonds. The 10-year Treasury finished the day at 4.71%, up two basis points.

"Treasury yields are up," said a trader. "We saw a little bit of a sell-off at the end of the day."

"Russia tightened by 11 basis points.

"Ecuador did pretty well. It tightened by almost 20 basis points.

"Columbia widened a little bit - by two points," added the trader.

The JP Morgan EMBI Global was down 0.10% on the day. Its spread to Treasuries tightened three basis points to 476 basis points.

Meanwhile, in primary action, Sungnam, South Korea-based KT Corp. priced $600 million of 10-year bonds (Baa1/A-) to yield 130 basis points over Treasuries, according to a market source.

One source said the "books were well subscribed."

The 5.875% bonds were priced at 98.65 to yield 6.075%.

The fixed-line telecommunications operator will use proceeds to repay debt maturing next year.

Lead managers were JP Morgan and Deutsche Bank Securities.

And adding to the pipeline, Techint Argentina SA is expected to issue a $275 million bond offering to finance the construction of pipelines across the Andes to bring gas to Lima.

Buenos Aries-based Techint will sell the bonds through its Transportadora de Gas del Peru SA unit.

Brazil down on minimum wage headline

In Brazil Friday, a defeat for President Luiz Inacio Lula da Silva over minimum wages hurt the country's bonds.

The senate voted against Lula's proposal to raise minimum wages by 8.3%, voting instead for a 14.5% raise. Lula had stressed that more than an 8.3% increase would burden the nation's social security system.

The bill will now return to the lower house, which passed the proposal on June 2 in a contentious battle.

As news of the senate defeat hit investors, Brazilian bonds fell.

"It had a news impact right out of the box," said a debt strategist. "If we go back to yesterday [Thursday] at three in the afternoon, C bonds were trading at about 91 cents.

"We got the headline. We opened 89.80, so about a point [down].

"We spent most of the day getting that back.

"By New York open at 9, they were about where we were almost yesterday [Thursday] afternoon," he said.

However, the direct impact of the news is hard to assess, given the fickleness of U.S. Treasury prices on Friday.

"Treasuries have been up and then went back down, then up a little bit.

"It looks like it had basically sort of a headline effect more than anything else. But the bonds are marginally lower," the strategist added.

Near the close, the Brazilian C bond was quoted down ¾ of a point at 90.375 bid.

The bond due 2040 was down 0.6 at 92½ bid in the morning. The bond closed around 921/4.

Brazil's component of the JP Morgan EMBI global fell 0.64%. Its spread to Treasuries tightened six basis points.

Long-term questions for Lula

The senate loss may have broader implications down the road for the Lula government as the president wrestles with escalating opposition.

"On Brazil, the Senate defeat is definitely undermining sentiment today though the market remains optimistic that either the lower house will reject the Senate's higher minimum wage level or Lula will eventually veto it," said an emerging markets analyst.

"No matter what happens, though, Lula clearly can't depend on a reliable senate to help pass his reforms, which could become a serious problem over time when the more controversial reforms come to a vote."

While the lack of support for the Lula administration's minimum wage proposal is not expected to have a big fiscal impact, it is certainly an embarrassment for the government, according to a market source.

"We heard that only 31 senators of the 45 ordinarily allied with Lula voted for the minimum wage increase.

"Jose Dirceu, Lula's chief of staff, was on the sidelines, which is seen to have been a major reason that Lula's minimum wage legislation's lost support in the senate," added the market source.

Lula's right-hand man Dirceu lost much of his power earlier this year stemming from the Bingo-gate bribery scandal.

Dirceu's close advisor Waldomiro Diniz was caught on tape allegedly seeking bribes from the leader of an illegal gambling racket ahead of the 2002 presidential elections.

However, the senate did approve non-controversial parts of the bankruptcy bill. Reforming the out-dated bankruptcy laws is a key part of Lula's microeconomic agenda.

Meanwhile, the Central Bank's Monetary Policy Committee (Copom) decision to hold the Selic rate at a three-year low Wednesday has been viewed as a positive by the capital markets.

"I think the market liked their decision to keep rates steady, so there hasn't been much of a negative response to holding rates steady," said the emerging market analyst.

"Ideally you'd like to see rates continue to fall, but so long as the economy is growing" and inflation is not an immediate problem "the market is comfortable with stable rates for now."

Russia up on Putin's comments

Russia's paper regained for the second day Friday on President Vladimir Putin's comments that the government does not want the country's second largest oil company Yukos to go bankrupt.

The Russian bond due 2005 was up 0.15 to 105.7 bid. The bond due 2010 was up 0.l25 to 108½ bid. And the bond due 2028 was up 2.875 to 147.375 bid.

Its component of the EMBI Global index rose 0.33%. Its spread to Treasuries tightened by 11 basis points to 279 basis points.

Mexican corporates hold steady

Mexican corporates moved little in Friday's session.

The bonds due 2009 of Mexico's biggest railroad company Grupo TFM bonds were down a quarter to 96¾ bid, 99 offered from Thursday's 97 bid, 99½ offered

Media company Innova S de RL's bonds due 2007 were unchanged at 101 bid, 102½ offered.

Cement company Cemex SA de CV saw its bonds due 2009 fall half a point to 116½ bid, 118½ offered from Thursday's 117 bid, 119 offered.

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