Emerging market debt up as market awaits Friday's GDP data; Brazil, Turkey, Russia gain; Ukraine prices

By Reshmi Basu and Paul A. Harris

New York, July 29 - Emerging market bonds traded higher as investors awaited the release of Friday's gross domestic product numbers for more clues as to whether the U.S. economy is cooling off or heating up.

Paper from Brazil, Russia and Turkey was bid up during Thursday's session.

"There has been a lot of local buying in Brazil," said a buy-side source. "And also there has been some buying in Russia from different accounts - trading and real money.

"There's a lot of two-way flow. But there was buying from accounts, that's why Brazil and Russia are up."

Turkey was also better on speculation that country would reach an agreement with the International Monetary Fund over a new standby agreement, according to the buyside source.

Turkey's current $19 billion standby accord with the IMF expires in February 2005.

Overall, emerging markets debt was higher. The JP Morgan EMBI Index rose 0.65% during Thursday's session. Its spread to Treasuries widened 11 basis points to 462 basis points.

In primary activity, Ukraine priced a downsized $500 million offering of five-year floating-rate notes (B1/B/B+) at par to yield 6-month Libor plus 337½ basis points.

The issue was reduced from a planned size of $600 million.

The buyside source quoted above decided to pass on the deal.

"I didn't consider it cheap enough compared to my holdings in the Ukraine," the source commented.

Citigroup, Credit Suisse First Boston and Dresdner Kleinwort Wasserstein were joint lead managers for the Rule 144A/Regulation S deal.

Also in primary news, price talk emerged on Magyar Telecom's planned €140 million sale of eight-year notes. The deal is talked at 10¾% to 11%.

Credit Suisse First Boston and BNP Paribas are running the deal for Hungary's second largest local fixed line telephone company.

A syndicate source said the deal is "going very well."

"We have built a strong book with a combination of traditional HY accounts and also EM buyers, who like the scarcity value since there is very little in the way of Hungary paper to play in.

"The strong free cash flow profile of the company has grabbed investor's attention - they are very much looking at this as an incumbent within its local market concession areas. Investors are taking comfort in the utility-like nature of the asset.

"Management is also playing extremely well on the road," said the source.

The deal is expected to price Friday.

Brazil edges higher

A combination of factors such as high oil prices and a new monetary policy director are giving a lift to Brazilian securities, according to a Latin American debt strategist at Refco EM.

On the macro level, the high price of oil has weakened confidence in the prospects for sustained economic growth in the United States, which in turn has repercussions in the Treasury market, where prices were flat to higher Thursday.

"That has given support to emerging markets," the strategist said.

"In Brazil, you have macroeconomic numbers that show that the economy is growing," he added. "The balance of trade has improved - that is supportive of the local market."

On Monday, Brazil posted a robust trade surplus of $954 million for the week ended July 25, which brought the country's year-to-date trade surplus to $17.68 billion.

And the market appears to be pleased with the replacement of former central bank monetary policy director Luiz Augusto Candiota.

Rodrigo Azevedo, the co-head of Latin America economic research at Credit Suisse First Boston in Sao Paulo, replaced Candiota, who was under investigation for alleged tax evasion.

Candiota resigned Wednesday while denying the accusations.

In trading Thursday the Brazil C bond was up 0.437 to 94.062 bid while the bond due 2040 was bid at 97.3, up 0.3 on the session.

However, the focus in emerging market remains on external factors. The release of U.S. GDP numbers could make or break Friday's session.

"It give us a little more direction on where this economy is going and how the Treasury market will perform," said the Refco EM strategist.

"Overall, the driver of prices in the last few days, either local or international, has been Treasuries."

Russia is a good buy, says analyst

The Yukos problems have put downward pressure on Russian paper in the short term but the credit is still a good buy, according to an emerging market analyst.

On Wednesday, the analyst published a note recommending investors reduce exposure to Mexico and add Russia; that trade has been working out so far and Russia should continue to outperform Mexico and other emerging market BBBs over the next few weeks.

"So long as oil is above $35/bbl and Yukos is not in serious danger of losing output, Russia should remain well supported by the oil boom," the analyst said.

"And with Russia still cheap to where it should trade relative to Mexico and other EM BBBs, its spreads over EM BBBs could tighten by another 25-35 basis points in the next few weeks," he said.

The Russian government said Thursday that Yukos' three oil-producing subsidiaries - Yuganskneftegaz, Samaraneftegaz, and Tomskneft, could continue operations.

The company's property and assets remain frozen, as the company continues its standoff with the government over what the government claims is a $3.4 billion tax bill.

Colombia may issue $1.5 billion

Colombia plans to sell $1.5 billion in international bonds, the High Council on Fiscal Policy said in its financial plan for next year.

However, there was no confirmation of details of the issuance.

"Colombia still needs to close its financial gap for this year. The assumption of the market is that it needs to issue fairly soon,' said the Refco strategist.

"We don't know if the window of opportunity, which is not very evident now, will remain open. "Colombia is one of those countries that needs to raise money in the capital markets," he said.

Asia more at risk of oil shocks

Since undergoing two cycles of corrections in April and May, emerging market debt has subsequently recovered on June's soft economic data, according to Banc of America Securities' Situation Room report Thursday.

Emerging market debt has been more sensitive to U.S. rates than geopolitical risk. The opposite holds true for the equities market.

The rise in oil prices, a reflection of increased geopolitical concerns, would more likely bear down in the equity market, according to the firm's report.

But a further increase in oil prices - leading to slower growth and higher inflation - will have an effect on emerging market paper, although the impact will be uneven across countries, BofA analyst Guillermo Estebanez wrote.

Low-debt Asian countries will be most vulnerable to rising oil prices.

High-debt Latin America countries, with the exception of Chile, are more immune to oil shocks, so prices for their debt will be more resilient.

Mexican corporates flat

In secondary trading, Mexican corporate bonds were at similar levels Thursday to a week earlier.

Railway company Grupo TFM's bond due 2012 was unchanged at 106 bid, 109 offered from last Wednesday's 106 bid, 110 offered.

Cement maker Cemex's bond due 2009 was unchanged from last Wednesday at 118½ bid, 119 offered.

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