Emerging market debt prices rise as Brazil 2040 hits 120 bid; Banco Votorantim prices $150 million

By Reshmi Basu and Paul A. Harris

New York, June 30 - Emerging market debt finished the session on a strong note as the Brazil bond due 2040 topped 120.

In the primary market, Banco Votorantim SA priced an upsized offering of $150 million of three-year floating-rate notes at par to yield three-month Libor plus 125 basis points.

The deal was three-times oversubscribed.

The notes, increased from $100 million, came at the wide end of talk. Talk for the coupon had been set at Libor plus 100 to 125 basis points.

Pactual Banking ran the Regulation S transaction, which was sold through the issuer's Nassau branch (/BB-/).

But Thai Aromatics has pulled its $300 million offering of bonds (issuer ratings Baa3/BBB), according to market sources.

One source told Prospect News that the company was unable to generate sufficient interest in the deal among investors at price talk of U.S. Treasuries plus 140 to 145 basis points.

The bookrunners were ABN Amro and UBS Investment Bank.

FOMC raises rates by 25 bps, EM up

In a foregone conclusion Thursday, the Federal Open Market Committee raised the federal funds target rate by 25 basis points to 3¼%, and signaled more tightening lies ahead.

There were no major changes to the Fed's analysis of the economy in its announcement.

In its post-meeting statement, the Fed said current rates remain "accommodative" and could be raised at a "measured pace."

"Although energy prices have risen further, the expansion remains firm and labor market conditions continue to improve gradually," the central bank said.

"Pressures on inflation have stayed elevated, but longer-term inflation expectations remain well contained."

Despite hints that the current tightening cycle is far from over, yields on U.S. Treasuries fell. The yield on the 10-year note stood at 3.92% at the end of the session, down from 3.99% in Wednesday's late trade.

That rally helped boost emerging markets too, said a trader.

"It's pretty much stronger across the board.

"Spreads seem to be tightening a little bit with the movement in Treasuries," he said, noting that Argentina was one of the better performers during the day.

During the session, the Brazil C bond gained 1/8 of a point to 102¼ bid. The Russia bond due 2030 moved up ¾ of a point to 111 7/8 bid. The Turkey bond due 2030 surged 1 3/8 points to 144 7/8 bid. The Venezuela bond due 2027 rose 0.40 to 105.15 bid.

"The tone is overall positive," said a Latin America debt strategist at Refco EM, saying that although interest rates increased, the market is beginning to think that the current cycle is coming to an end.

Further hikes in future obviously means downward pressure for emerging markets. But the strategist said that he believes that the Fed will stop its current campaign at 3.75%, followed by intermittent hikes after that and "a possible cut in interest rates next year if the U.S. economy doesn't outperform the current growth pattern," an outcome which is a positive for emerging markets, he added.

"The strength of the U.S. economy is not as positive as the Fed is trying to communicate," he said.

No major correction, says strategist

Furthermore, improved fundamentals and high commodity prices, in particular increasing oil prices, spell good news for the Latin America region, he remarked

"I think prices will reflect that. We are going to have periods of volatility but overall, I don't foresee a major correction in emerging markets in the next three months."

In July, there is an expectation that investors will need to put cash to work as amortization and interest payments come due.

The search for yield and the search for product "is out there. It's not easy to invest your money because there are not a lot of instruments out there," noted the strategist.

Flows and the incoming cash create a need for reinvestment, he said, citing Thursday's oversubscribed issue by Banco Votorantim as a sign that appetite is there.

"We are going to see it in sovereigns. We are also going to see it in corporates."

Brazil 2040 tops 120 bid

Meanwhile in trading, the Brazil 2040 bond added 0.55 to 120.20 bid.

"It seems like every month we're touching on historical highs and that reflects a little bit the search for yield and for fundamentals and for price appreciation," commented the strategist.

The market will continue to see inflows of capital into the region, producing more historical highs in the next few months. But there is also the threat that certain news will filter into the market resulting in volatilities, such as the recent Brazilian kickback scandal.

However in 2006, the story changes for the region as the electoral cycle begins.

"We are going to have to determine what is it that presents more risks overall, but we're talking about six to seven months from now," he remarked.

"In the meantime, I think emerging markets are heading for a good performance for the rest of the year."

Citigroup top underwriter year to date

Citigroup was once more the top underwriter of emerging markets bonds for the year so far, a position it has now held for three straight months, according to data compiled by Prospect News.

Meanwhile emerging markets issuance totals $70.24 billion year to date.

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