Emerging market paper down; Brazil surprises market with upsized $1 billion deal

By Reshmi Basu and Paul A. Harris

New York, Oct. 6 - Emerging market debt slid Wednesday but Brazil and Peru still managed to price the equivalent of $1.8 billion in new paper.

Secondary trading remained slow ahead of Friday's release of non-farm payroll numbers, according to a trader.

Overall, The JP Morgan EMBI+ fell 0.22%. Its spread to Treasuries tightened three basis points to 402 basis points.

The secondary market may have been quiet, but the primary market heated up as both Brazil and Peru tapped the markets with upsized deals.

Late Wednesday, Brazil priced its upsized $1 billion bonds due 2019 (B1/BB-) at 97.78 to yield 9.15% via Citigroup and JP Morgan. The unexpected deal was a drive-by, with the morning announcement surprising investors. This is the second tap of the markets by Brazil in two weeks.

The book was over-subscribed with more than $2 billion in orders.

Brazilian paper was slightly down, according to a buyside source.

"The curve sold off a little bit. It's not doing that great. It's down half a point in the gray," commented the source.

However, it does make sense for the country to come in before the Federal Reserve pushes up rates, according to the buyside source.

"On the shorter horizon, they were worried about the payroll number on Friday. They didn't want to take a chance."

Overall in trading, Brazil's paper was down. The C bond lost 0.626 to 99.187 bid while the bond due 2040 was down 1.60 to 112.10 bid.

Peru prices euro deal

In its debut in the euro-denominated market, the Republic of Peru priced an upsized €650 million of 10-year bonds (Ba3/BB) at 99.658 to yield 7.55%.

The deal, increased from €500 million, was well received, according to the buyside source.

"That was unexpected in a way because I think people were thinking that the issuance would come out in relation to Paris Club debt," said the source.

"The euro-denominated debt was a bit of a surprise."

"It's doing pretty well" in trading, commented the source.

The county has said that it plans to pre-pay a portion of its Paris Club debt, of which $1.09 billion falls due in 2005.

"I think they will issue a dollar deal in the next few months, but that'll be a tough task," said the trader.

The country said it would submit a Paris Club proposal in November.

Moody's upgrades

Moody's upgraded the outlook to positive from stable for Russia's sovereign rating, giving a boost to its bonds.

The Russia bond due 2018 was bid at 1321/2, up 1¼ on the session. The bond due 2028 was up 1½ points to 155 bid. The bond due 2030 was bid at 96.187, down 0.813.

E.U. gives Turkey green light

Meanwhile the European Commission gave the green light to start membership talks with Turkey, but warned that it would suspend negotiations if the country rescinds the democratic and human rights reforms it has pushed through to meet E.U. criteria.

No start date has been given but E.U. leaders meet at a Dec. 17 summit.

"I actually think that overall the report was not as positive as expected. We saw a sell-off initially, and but now it is starting to come back," said the buy-side source.

"There wasn't a lot of trading based on that."

The Turkey bond due 2034 was unchanged on the day at 100¾ bid. The bond due 2009 tightened six basis points to 297 basis points.

U.S. performance could derail EM

The buyside source added that the overall tone of the International Monetary Fund meeting was positive.

"I think the general feeling is that the external environment continues to be positive for EM and probably will be so through year-end.

"The general message, if any, was that the problems are not coming from the EM side, which enjoys pretty solid fundamentals."

Rather it is the United States economy and the strength of the global recovery that will influence emerging markets, noted the source.

Furthermore, concerns over China's efforts to cool its economy have dwindled compared to six months ago, a sign that the government does not have the authority to slow down growth, according to the buyside source.

"Everybody is wondering - soft landing or hard landing in terms of their growth.

"But I think the general conclusion was that there might be no landing for the time being"- a plus for emerging markets.

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