Emerging market paper firms on Brazil's GDP figures; modest $69.9 million fund outflows

By Reshmi Basu and Paul A. Harris

New York, May 27 - Emerging market debt rebounded Thursday, fueled by better than expected GDP numbers from Brazil.

That was in contrast to Wednesday when a note by JP Morgan recommending reduced exposure in Brazil and some other emerging markets sovereigns spurred a sell off.

But the good news out of Brazil Thursday morning helped temper concern that Brazil's economy was stalling. The country's gross domestic product grew by 2.7% during the first quarter of 2004, exceeding economists' expectations.

"This helped the market to continue to work higher," said Enrique Alvarez, Latin American debt strategist at IDEAglobal, a research firm.

"We've built on the number during the day.

"Domestic currencies seem to have calmed, so that's also subtracting pressure from the market," said Alvarez.

"In the sense that you are seeing less selling pressure on debt instruments as the volatilities calm down in the currency markets in Latin America.

"Overall the market is attempting to break back into higher territory," he added.

The JP Morgan EMBI Index jumped 0.32% higher during Thursday's session. Its spread to Treasuries tightened by three basis points to 505 basis points.

While Brazil's sovereign paper edged higher, corporate issues were trading flat in the afternoon.

"They're about flat," said an emerging market analyst.

Regardless of the good news about the South American nation's economy, issues such as the lack of liquidity and maturity concerns in the future are weighing on investors' minds.

"Some positives are being offset by negatives," said the analyst.

Despite Thursday's flat trading, Brazilian corporates have made gains over the past week relative to Brazilian sovereigns.

Brazilian mining company Companhia Vale do Rio Doce was quoted 260 basis points below the Brazilian bond due 2040 late in Thursday's session, a relative improvement of 26 basis points on a week earlier.

State-oil company Petrobas traded 235 basis points below the sovereign bond due 2013, narrowing by four basis points in the week.

Also Brazil's second biggest paper and pulp company Votorantim Celulose e Papel traded 232 basis points below the government bond due 2014, tightening by 21 basis points in the week.

The world's fifth largest beverage producer AmBev traded 321 basis points below the sovereign bond due 2013, improving 21 basis points.

However, steelmaker Companhia Siderurgica Nacional saw its debt trade was down relative to the Brazilian sovereign. It traded 109 basis points above the bond due 2013, moving out 26 basis points.

Modest EM outflows

For the week ending May 26, emerging market bond net outflows were $69.9 million, about 0.45% of total assets, according to Brad Durham, managing director of EmergingPortfolio.com Fund Research, which tracks 251 dedicated emerging market funds.

The outflow was "not as savage as previous weeks," commented Durham.

The week ending May 19 saw $308.3 million of net outflows from emerging market bond funds, the biggest selling of these funds since EmergingPortfolio.com began tracking weekly fund flows four years ago.

And global bonds lost $35.9 million.

Interest rates continue to hold investors' attention but as some point widening spreads will bring back investors.

"The usual suspects such as concerns over oil prices igniting inflation" and "the knowledge that interest rates are going to reduce the attractiveness of bonds going forward" is driving the sell-off, according to Durham.

But, he added: "Emerging market spreads have widened about 500 basis points over Treasuries, it's going to have to start looking attractive again."

Attention shifts from rates

There are already signs of a changing market outlook.

"Investors appear to be less concerned about interest rate hikes in the U.S. versus their sentiment a couple of weeks ago," said IDEAglobal's Alvarez.

"The market has drifted higher over a course of a week, but overall participation is still not widespread," he added.

The market has recuperated some of its losses, an encouraging sign for investors. But they need more confirmation in order to come back to the market.

"For one, oil prices need to continue to fall off from the above $40 per barrel level," said Alvarez.

"That favors economic activity in the U.S. and in turn, takes away some of the inflation concerns that people have been focusing on," he added.

"Obviously the sector that would hurt if oil retreats is that of the Latin oil producers such as Ecuador, Mexico and Venezuela.

"But for the overall market I think it's positive."

And for now the inflation reading in the United States is the main concern.

"It's been sort of wait and see and playing the overall sounds that were coming off the domestic markets on currencies and local interest rates."

"With today's move in U.S. 10-year rates, the ball is back in U.S. rate territory for debt price direction," Alvarez told Prospect News.

Bank Negara delays

In primary news, PT Bank Negara Indonesia is pushing back its proposed offering of $200 to $300 million of 10-year subordinated notes due to market conditions.

The issue had been expected to price in early June.

JP Morgan and Barclays Capital were the bookrunners on the deal.

And Korea's Development Bank's $500 million bond offering may be shelved.

Talk early in the session suggested that the issue had been expected to price in June.

But late in the day another source said the deal would price when market conditions approve.

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