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Published on 5/25/2005 in the Prospect News Emerging Markets Daily.

Emerging market debt up despite Treasuries' late plunge; Brazil, Jamaica sell $800 million in new bonds

By Reshmi Basu and Paul A. Harris

New York, May 25 - Emerging market debt held on to gains Wednesday despite a late-afternoon pullback in the U.S. Treasuries market.

In the primary market, issuers such as Brazil and Jamaica took advantage of the market's recent stability to price $800 million of new securities. Both issues rose in the secondary.

Meanwhile, emerging markets continued to climb higher as the Brazil bond due 2040 broke the 117 level.

"Trading was good," said a trader. "We have a nice little rally today [Wednesday]. Brazil '40s traded up a good deal, up about ¾ of a point. We're at 117.35 bid."

The trader added that both Venezuela and Ecuador "caught a little bit of a bid."

"They traded up for the first time in a couple of days. And everything is pretty good right here," he remarked.

During the session, the Ecuador bond due 2030 added 0.45 to 79 bid. The Venezuela bond due 2027 gained 0.85 to 99.35 bid.

Other winners included Mexico and Turkey. The Mexico bond due 2009 moved up 0.15 to 119.15 bid. The Turkey bond due 2030 packed in 1/8 of a point to 136 bid.

Emerging market debt showed resilience despite a late sell-off in Treasuries. The yield on the 10-year note rose in response to comments made by Federal Reserve Bank president Jack Guynn, who indicated that monetary tightening is far from over.

"My point is that all of the inflation measures over the past seven or eight quarters show a similar - but distinct - upward tilt," Guynn said to a homebuilders association in Atlanta.

Those comments put pressure on the Treasuries market. Earlier in the session, the yield on the 10-year note touched 4% but later blew out to 4.09% in late trading.

"Treasuries were up in the morning and then they collapsed in the afternoon," said the trader.

"It's just that technicals are good in EM. Fundamentals are good. There's real-money buying. We're holding here...seems that nothing is distracting us. Treasuries down - and EM is doing fine."

The trader added that everyone, from real money to hedge funds, played in Wednesday's session.

"Hedge funds were covering the shorts that they had," he remarked.

Brazil, Jamaica sell $800 million

Issuers took advantage of the recent rally to hit the market running. Both Brazil and Jamaica issued new securities.

The Federative Republic of Brazil reopened its 8¼% bonds due January 2034 (B1/BB-/BB-) to add $500 million.

The reopening priced at 94 1/8 to yield 8.814%.

Bear Stearns and Deutsche Bank ran the re-opening of the global bonds.

The government of Jamaica priced an upsized offering of $300 million 10-year bonds (B1/B) at 99.191 to yield 9 1/8%.

Bear Stearns was also the lead manager of the issue.

Between the two issues, there was close to $3 billion in orders, according to a syndicate source. The book size for Brazil stood at $2 billion. And the book was almost $900 million in orders for Jamaica.

"We thought they would both do well, but were surprised at that level of demand," said the syndicate source.

Issuers took advantage of this week's lack of economic data and the rallying market to tap investors, said the source.

"It's a quiet week. There's almost no real economic news this week. And in that kind of context, especially with the benign statements on inflation coming out of the Fed...in this kind of context, bonds generally drift higher.

"The last thing you want to do is have surprises in the market," he noted.

The syndicate source also added that next week is abbreviated due to observance of Memorial Day on Monday and non-farm payroll numbers on Friday of that week.

"And then after that, you have the CPI numbers and who knows what happens," he remarked.

The source added that since Brazil has only $1 billion left to do, it was "not really enough for them to do a stand-alone new issue - a benchmark issue in their minds."

"So strategically...they are going to target certain key tenors on their curve, 15-year bonds and 30-year bonds and reopen them to make them larger and more liquid to reach benchmark status," he said.

And essentially, that is what Brazil did two week ago when it reopened its 8 7/8% bonds due October 2019 (15-year bonds) to add $500 million, noted the source.

"For several days now, we've seen investors extend duration. Part of what's going on here, if you look at the slope of the Brazil curve versus the U.S. Treasuries curve, the Brazil curve is quite a bit steeper.

"And most people think that Brazil's curve is going to flatten, so while the curve itself may not converge to the U.S. Treasury curve, the slope will," he remarked.

"And if the yield curve is going to flatten, you want to be on the long end.

"You can see on the '40s how strong they have been over the last week. You can see a lot of the demand gravitate towards the long end of Brazil.

"Given Brazil's preference to make the 30-year more of a benchmark, it seems to be good timing and what investors wanted to do," he replied.

Jamaica and Brazil up in secondary

Both the Jamaica and the Brazil issues moved higher in the secondary market, according to sources.

Jamaica's new 10-year bonds traded well, according to the trader. He spotted the bond up almost a point.

And Brazil is "coming out at 94 1/8. And it's 94 ½ bid. I think it's doing okay," the trader added.

During the session, the Brazil bond due 2034 was up 0.70, according to one source.

On the corporate side, Mexican Retailer Controladora Comercial Mexicana (CCM) priced a $200 million issue of 6 5/8% 10-year senior notes (Baa2/BBB-/BBB-) at 99 5/8 to yield 6.677%.

Credit Suisse First Boston ran the books for the Rule 144A with registration rights issue. Citigroup was the co-manager.

And Ukraine's Ukrsotsbank priced $100 million of three-year bonds (Ba3/B-) at par to yield 9% via ABN Amro.

Also in the pipeline, the Development Bank of Kazakhstan (issuer ratings Baa3/BBB-/BBB-) talked its $100 million offering of 15-year eurobonds at 6¾% to 6 7/8%. Pricing is expected on Thursday.

UBS Investment Bank has the books.

And Thai Oil Public Co. Ltd. plans to start a roadshow for a proposed issue of $250 million in 10-year bonds next week.

The roadshow will start in Singapore on Monday, move to Hong Kong on Tuesday and wrap up in London on Wednesday.

ABN Amro and UBS Investment Bank are running the Regulation S offering of fixed rate notes.


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