Emerging market paper up as Brazil flies high; funds take in $123 million; buying mood in the market

By Reshmi Basu and Paul A. Harris

New York, Nov. 12 - Emerging market debt rallied Friday as Brazilian paper surged in response to the weaker U.S. dollar.

However trading was slow, according to a buyside source.

"There was more activity today [Friday] than yesterday [Thursday] but there definitely seems to be a hangover from yesterday" as U.S. investors parlayed Veteran's Day into a four day weekend, he said.

During Friday's session, the JP Morgan EMBI+ Index gained 0.64%. Its spread to Treasuries tightened two basis points to 390 basis points.

Brazilian paper was up as the real ended at its highest level in six months at R$2.79 to the dollar.

Brazil's C bond added 0.562 to 99.937 bid while the bond due 2040 was up two points to 113.80 bid.

Paper from Russia was also up. The bond due 2030 added one point to 101 bid.

Venezuela's bond due 2027 was up 0.15 to 103 bid and Turkey's bond due 2030 gained 1.437 to 138.687 bid.

Meanwhile, Mexico's bond due 2008 gained 0.05 to 114¼ bid. The Bank of Mexico kept interest rates steady at its twice-monthly meeting.

TCO talk

In the primary market, Kazakhstan's Tengizchevroil Finance Co set guidance for its $1.1 billion asset-backed bonds due 2014 (Baa3//BBB-) at Treasuries plus 225 to 250 basis points.

According to the buyside source, Reuters reported overnight Thursday that the government would levy some tax liability on the company.

Because of that, there was "a lot of consternation in the market," he said. But he added that the book was more than two times oversubscribed.

"It's in very good shape. It's a billion dollar deal, so you are talking about over $2 billion in orders. And the underwriters are denying that the story is accurate. It should be okay. Everything else is going okay," he commented.

ABN Amro and Lehman Brothers are running the books.

Drive-bys likely, predicts investor

The investor also added that issuers would likely come to market in a drive-by style, with little warning. Panama is a possible candidate to drop a deal on the market.

"Everyone is speculating on the next Brazil. I've heard that it possibly may re-tap the euro. They have a lot of money to raise next year. They will be coming sooner or later. And they prefer sooner," he said.

One trend likely to make its way into international emerging markets is issuers tapping their local currency, as the Republic of Colombia did last Tuesday. The country priced $375 million equivalent of global notes due 2010 (Ba2/BB/BB) at 99.658 to yield 11 7/8%.

"It is a trend that will remain present as long as we have the continuation of a weak dollar - that is the structural backbone for this whole trend," said Alberto Bernal, head of Latin America research for think tank IDEAglobal.

"Furthermore, it presents a win-win situation for the issuers," said Bernal.

"The reason for that is because the countries that are issuing the debt in domestic currency usually get their tax revenues from that same local currency.

"For example, in the case of the Colombia bond, the interest payment will be done in pesos, even though it is calculated against the dollar rate at that specific point in time.

"But from the perspective of the government, it will be as if the government was paying an interest payment in pesos. The cash flow of the government in question is likely to become much more stable because it is a function of their own currency," he told Prospect News.

Investors are betting that currencies in Latin America will either remain stable or continue to appreciate, he said.

And investors are gaining more confidence because of the region's strong fundamentals. However, for investors, the most important determining factor is the continued weakness of the dollar for the foreseeable future, Bernal said.

Inflows at $123 million

Emerging market bonds had inflows of $123 million in the week ending Nov. 10, according to EmergingPortfolio.com Fund Research.

This was the second week of inflows, in which a total of $189 million has been poured into the market.

Inflows are $475 million year-to-date, which is 2.97% of their beginning of year total assets.

Global bond funds had inflows of $683 million in the week, extending the winning streak to five weeks. These funds have had $6.7 billion of inflows year-to-date.

Buying frenzy, says investor

Investors are in buying mood, according to the buyside source.

"Right now, the market seems to be in this frenzy - just buying anything that they can get their hands on.

"It's like the way it was back in January. It was just a frenzy and then you had a market correction as people became less confident about what was going on in the U.S and treasury market.

"And I really worry about that type of scenario occurring again," he said.

Meanwhile, the buyside source continues to look to upgrade whenever he can. He likes Russia and Kazakhstan.

"Those are two countries that I continue to be overweight. I like Brazil, Colombia and Peru. At the same time, the market prices are not cheap. So that just makes me more cautious," he said.

In Latin America, Mexico, Brazil and Colombia are good picks, according to Bernal.

"Mexico continues to be a good story even though the structural reform process continues to lag. I don't see much room for Mexico to sell off if and when interest rates continue to rise. I think that Mexico will be upgraded by the rating agencies soon," added Bernal.

He noted that Brazil continues to make strides in regards to its structural work as well as stay on the path of fiscal responsibility and diversification of its exports.

"And it's trying to do the best that it can to become more resilient to external shocks. I think that the market will encourage the trend by valuing Brazil much better than it has done during other downtime periods," he said.

Bernal also likes Colombia's story because of the strength of president Alvaro Uribe well as an improving economy and expanding export base.

"And Colombia will have a free trade agreement with the U.S soon. In addition, the security situation in that country is getting better, so foreign investment is coming back," Bernal commented.

He is cautious on countries such as Ecuador and Peru because of their political instability. Argentina, Venezuela and Colombia pose risks as well.

"I hope that Argentina offers a good deal in which many people participate on the restructuring. If they don't, then they will continue to have the debt overhang problem and that will be a problem," he noted.

Venezuela's dependence on oil makes it vulnerable to the volatility in the commodity markets, he said.

"And that may be a problem, once you have stabilization of oil prices at lower levels," he observed.

"Uruguay, even though they have a left wing president [president-elect Tabare Vazquez], I do expect the president to continue to follow the responsible policies of the outgoing administration.

"That said, it remains to be seen whether this trend can linger into the future," he said.

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