Emerging market debt bounces with Treasuries; LG-Caltex prices; Brazil up as Supreme Court votes

By Reshmi Basu and Paul A. Harris

New York, Aug. 17 - Emerging market debt chased fickle Treasury prices Wednesday while Brazilian bonds were up as the Supreme Court voted on a plan to tax pensions.

Profit-taking and oil price relief took something of a bite out of U.S. Treasuries Wednesday, which ended the day lower at 4.24% for the benchmark 10-year note. Earlier in the session, as oil reached $47.45 per barrel, the 10-year yield hit 4.16%, its lowest level since April. Oil closed at $47.27 per barrel.

Wednesday's session in emerging markets was "alright" and "a little busy," according to a trader. "We went the way of Treasuries.

"Mexico tightened a little bit today [Wednesday] by three basis points.

"It was a decent EM volume day, trading-wise. The street was pretty active - Venezuela and Brazil mostly," he added.

The Mexico bond due 2026 tightened three basis points to close at 229 basis points over U.S. Treasuries. And Turkey's bond due 2009 tightened 16 basis points to 301 basis points.

Overall, the JP Morgan EMBI Index was up 0.09% during Wednesday's session. Its spread to Treasuries tightened seven basis points to 443 basis points.

The market is begrudging going higher, according to an informed source. The outlook is still cautious because of the downside risk on Treasuries.

"And you do have these various reform issues happening and not happening in places like Brazil. But at the same time, we've seen a pretty good rally in the last few weeks," added the source.

But a sudden shift in U.S. macro data could turn the market.

Looking ahead, investors will be paying attention to supply in September.

LG-Caltex prices

In primary action, LG-Caltex Oil Corp. priced $300 million of 10-year notes (Baa2/BBB) at 99.122 to yield Treasuries plus 138 basis points.

The rarity of an issue from LG-Caltex boosted its attractiveness, according to a market source.

The deal was well placed, mostly with end accounts.

"There's been a lot of supply out of Korea," said the informed source. "And I think that investors are requiring a larger new issue premium to get Korean issues done."

Although it is a good name, LG-Caltex had to offer a little more yield than other Korean issuers have been doing recently.

"Given that it was a small deal, people saw it as reasonable value and it traded in a little."

After the issue was freed to trade, it was quoted at 99.4551 bid, 99.8343 offered, up a little from its original level.

Bank of America, Citigroup and Deutsche Bank were lead managers for the Rule 144A/Regulation S deal for South Korea's second largest oil refiner.

Also in secondary trading, the U.S. dollar tranche of the new deal from Singapore's United Overseas Bank was performing poorly.

The $1 billion subordinated bond widened on some profit taking, according to an informed source.

In trading Wednesday it closed at 115 basis points bid, 112 basis points offered. It priced at 114 basis points over Treasuries.

Brazil up on high court vote

Brazil bonds rose on news that the President Luiz Inacio Lula da Silva's government won two more votes in the high court in favor of a tax on retirement pensions.

The Supreme Court continued deliberation on the constitutionality of an 11% tax on pensions of government retirees. The government has said it must win to reduce the budget deficit and to court investors.

Two justices have rejected the tax and three have supported it with six more justices left to vote.

A decision to overturn the law would cost the government about $627 million a year.

"Brazil is up today [Wednesday] because everyone is talking about this vote in the Supreme Court," said the informed source. "And the market is watching the voting, judge by judge.

"There was this one guy who was really on the fence and he voted for the government.

"And people are saying that it is more likely that the government wins this round."

If Lula loses, investors will question his strength as a leader.

"It's important in terms of showing progress on the reform agenda," added the source.

The trader said Brazil prices moved higher on news in the high court.

"Kind of trading on rumors," he added.

Meanwhile, as expected, Brazil's central bank held its benchmark lending rate at 16%.

The Brazil C bond was bid at 96.625, up 0.375 on the day while the bond due 2040 added 0.65 to 104 bid.

Philippines rally stalls

Philippine sovereign bonds have hit a wall, as prices have been unable to edge higher. But it may be unfair to single out the credit since the whole emerging market sector appears unable to get a lift.

"The Philippines have gone up a lot, too," said the informed source. "Before the election, you had a pretty big rally in the Phils.

"And if you compare the Phils to similarly weighted country like Peru, it's trading in line.

"At one point, it was well wide of Peru or Colombia or something like that."

And the lack of definition from President Gloria Macapagal Arroyo's government may be holding its paper back. Arroya was re-elected in May.

"I think a lot of people would say that the whole market is hitting a wall - just because things have gotten expensive enough that it's hard to argue that things should continue to grind tighter.

"The Philippines has the tendency to go through these little cycles where it runs up for awhile and then it does hit a wall, and then it consolidates there and then it does it again."

And locals play a significant role in supporting prices of the Philippines' global debt.

Issuers in September

Issuers will come back to the market after Labor Day, according to the informed source.

Eastern European issuers may actually started looking at the market ahead of Labor Day because their summer vacation period ends a week before Labor Day.

Meanwhile, Brazil has $1 billion remaining to finish off its financing requirements in 2004, according to a market source. He noted the country's external debt payments amount to $2.91 billion this year.

Turkey is expected to issue $1.5 billion with $1.23 billion in debt payments due, the source added.

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