Emerging markets higher; Brazil gains on upgrade; Hong Long relaunches notes

By Aaron Hochman-Zimmerman

New York, Aug. 23 - Emerging market bonds were seen moving up on Thursday, investors apparently heartened by signs that the ominous credit crunch that has recently roiled the markets may be receding.

Among the positive signs seen was Bank of America investing $2 billion in troubled mortgage producer Countrywide Financial Corp., convincing the financial markets that the giant mortgage lender is not going to disastrously go belly up any time soon.

They also took some inspiration from the strength the equity markets have been slowing lately, since stocks are considered, like emerging markets, to be a risky investment relative to U.S. Treasuries. It should be noted, however, that stocks finally did falter Thursday after nearly a week of advances when Countrywide's chief executive officer said in an interview that a U.S. recession was possible.

Also giving the emerging sector a boost was the announcement by Moody's Investors Service that it was lifting Brazil's foreign- and local-currency bond ratings a notch to Ba1, just a step away from investment grade. As could be expected, Brazil's bonds firmed solidly.

Other Latin American upsiders included Mexico, Ecuador and Argentina, although the latter two volatile, risky high-beta credits were off their session highs.

Earlier in the day, Asian bonds were seen mostly firmer, taking their cue from the gains seen in emerging markets on Wednesday as well as the news late that day of BofA's big vote of confidence in Countrywide and, by extension, the whole U.S. mortgage industry. Gainers included the Philippines, particularly in the falling price of credit default swaps contracts used to hedge against a possible default in the underlying debt, and India.

In the primary market mild improvements over the past sessions have eased tensions and inspired one issue that was previously on hold to reappear.

China's Hong Long Holdings Ltd. announced a relaunch of its dollar-denominated senior notes, but gave scant details about how closely it will resemble the original.

Citigroup will again take the books for the Regulation S deal.

Hong Long's board of directors is considering adding warrants to the reissue.

In late July, the Shenzhen, China-based property developer was unable to price a $175 to $200 million five to seven-year offer through Citigroup.

EM spreads tighter

With Treasuries generally unchanged to lower on the session - the yield on the two-year note rose nearly 10 bps to 4.26%, while the benchmark 10-year notes' yield shot as high as 4.71% before coming off that level to end about unchanged at 4.64% - spreads versus emerging paper, the key measure of investor tolerance of risk, or aversion to it, were seen having tightened marginally. The widely followed EMBI+ index of emerging debt performance compiled by JP Morgan showed average EM yields having tightened by 2 bps to 229 bps, on top of the 16 bps spread tightening seen on Wednesday. Overall EM returns rose by 0.24%.

Brazil was the standout performer on Thursday, given a big boost by the news that Moody's had upped its foreign- and domestic-denominated bonds one notch to Ba1 while pushing its foreign currency bond ceiling actually into investment grade, at Baa1.

The country's bonds returned 0.36% during the session, according to the EMBI+, while their average spread off Treasuries tightened 3 bps.

Brazil's benchmark 11% dollar-denominated global bonds due 2040, the most liquid and widely held emerging debt instrument, was quoted up about 1/3 point at 101.35. However, its local-currency bonds were seen slightly easier, with the yield on its benchmark real-denominated zero-coupon bonds due 2008 quoted up 2 bps to 11.34%.

Moody's said the ratings upgrade reflected "the strong improvement in the government's overall debt profile, anticipated further reductions in the government debt burden, and expected continued strengthening of external debt indicators."

"Brazil's external vulnerability indicators have registered major improvements in recent years," Moody's senior analyst Mauro Leos, wrote in the upgrade message, "and substantially increased international reserves cushion the Brazilian economy against possible external shocks."

Brazil appears "better prepared than other emerging market economies to face a downturn in external economic conditions because of both its solid international reserve position and its diversified export structure in terms of products and geographic markets," Leos added.

RBC Capital Markets said in a research note that the Moody's move "should give emerging markets broadly a strong credibility boost," since it is a vote of confidence that the asset class' fundamentals "are in good shape and well prepared to weather the external storm."

Ecuador higher

Elsewhere in Latin American trading, Ecuador's bonds rose, continuing the recent trend of strength in the risky high-beta names, a group which also includes Argentina and Venezuela.

Quito's benchmark 10% bonds due 2030 were quoted up more than 1 point on the day to 85.35, although that closing level was slightly below the 85.5 intraday peak.

Ecuador's government raised its estimate of anticipated 2007 tax receipts by 2.7%.

Fellow high-beta issuer Argentina's bonds were also seen solidly performing, as the risky, volatile names helped lead the upturn, although its benchmark 8.28% bonds due 2033 also came slightly off their peak intraday level around 82.75. The bonds still did finish up more than 1 point on the session.

Mexico's global bonds due 2017 were seen up more than ½ point on the day to the 99 level, as legislators reported progress on long-awaited tax reform measures. Its peso-denominated 7¼% bonds due 2016 were steady on the day at a yield of around 7.65%.

Asian names better

Earlier, bonds of Asian issuers were seen firmer, as markets in that part of the world took their cue from the gains seen on Wednesday, powered by feeling that the Federal Reserve - which unexpectedly cut its discount lending rate by 50 bps in an effort to calm the markets - will not let the credit debacle get too far out of hand.

The key issue, the Philippines' benchmark 2032 bonds were seen up from Wednesday's levels, rising to 95.25 bid, 95.75 offered from 94.5 bid, 95.5 offered. Meantime, the cost of a five-year CDS contract on those bonds fell by 16 bps, quoted at around 177/180 bps.

Later on Thursday, the country's central bank announced that its policy-making Monetary Board had decided to hold its key interest rates steady at 6% for overnight borrowing and 8% for overnight lending.

While the central bank had slashed its headline overnight borrowing rate by 150 basis points last month to 6% - the first such rate cut in four years - the Monetary Board this time around chose to maintain a "'neutral" policy stance, encouraged by what it saw as a benign inflation outlook, with the balance of risks to future inflation expected to remain essentially unchanged.

India's benchmark 10-year rupee-denominated bonds were seen having risen slightly, to just over 97.25, helped by investor sentiment that there is ample liquidity in that country's banking system.

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