Emerging market debt sees strong gains, fund inflows at $63 million, Uruguay brings $200 million retap

By Reshmi Basu and Paul A. Harris

New York, May 26 - Emerging market debt saw another session of steady gains, as Brazilian securities entered a new trading range.

"The [EM] market had a another very good day, led by Brazil," said Enrique Alvarez, Latin America debt strategist for think tank IDEAglobal, adding that it was combination of factors that drove the market higher.

U.S. equity and Treasury markets performed well on news that the Commerce Department upwardly revised first quarter GDP to 3.5% from 3.1%.

The Dow Jones Industrial Average rose 79.80 points to 10,537.60.

But while the GDP numbers showed growth, it was not strong enough to knock down U.S. Treasuries.

The yield on the 10-year note stood at 4.08% at the end of the day, down marginally from Wednesday's 4.09%.

"You had some relief coming from the U.S. side," added Alvarez.

"Risk aversion has been wiped away as a factor affecting the market. You have the Dow on the upside and that's helping generate some interest in high-risk assets like Latin America.

"You had very stable Treasury rates at 4.08%, which I think is benign overall for Latin America and that's also a reason why you had the strength," he added.

On the domestic front, factors such as substantial local interest in bonds and currency strength are underpinning the market's firmness, remarked Alvarez.

On Wednesday, the Brazilian real closed at 2.4088 per dollar and on Thursday, the Mexico peso closed at 10.9595 per dollar.

"Overall, I think you have a combination of high flows into the category and just an improved sense for higher-risk assets," he said.

Brazil helped lead the way during the session. The C bond inched up 0.37 to 101.87 while the bond due 2040 gained 0.90 to 118.10 bid.

Alvarez added that Colombia's paper reversed its recent trend of underperforming the market by scoring a solid performance on Thursday.

The Colombia bond due 2012 traded up 1.15 points to 114.40 bid while the bond due 2030 moved up 1¼ point to 114 bid.

The sovereign bonds traded up on the country's tax intake and that a view it may be the one double-B credit that investors can see having potential spread compression, noted Alvarez.

But Ecuador underperformed as the new government looks to be aggressively shying away from fiscal prudence. The Ecuador bond due 2030 fell 0.60 to 78½ bid.

Alvarez added that there were stories circulating of a potential coup on April 22 to bring back former ousted president Lucio Gutierrez.

"The overall political support for the government seems to wane continuously," he added.

Fund inflows at $63 million

The sector's mutual funds saw positive flows this week for the third straight week. Emerging market bond funds had inflows of $63 million during the week ending May 25, according to EmergingPortfolio.com Fund Research.

These funds now have $3.088 billion of inflows year to date.

Global bond funds pulled in $332 million this week. These funds have had $7.379 billion of inflows year to date.

Uruguay reopens bonds due 2017

In the primary market, the Republic of Uruguay priced a $200 million add-on to its 9 ¼% notes due May 17, 2017 (B3/B/B+) at 102.723 to yield 8 7/8%.

The pricing of the $200 million add-on, bringing the total size of the issue to $500 million, completes Uruguay's 2005 financing needs

Citigroup and Morgan Stanley ran the books for the registered, quick-to-market transaction.

"It's a very small amount. And all they are doing is establishing another point along their yield curve," remarked Alvarez.

"You had the initial '17 issuance but it was for a small $300 million amount - being such an odd amount, it's difficult to trade"

But the tap brings the issue to $500 million, "which becomes a serious point along their curve," he added.

Uruguay joins a string of issuers this week who are taking advantage of the "Goldilocks scenario," according to an emerging market analyst.

"10Y UST rates are near 4.0%, the Eurozone is awash with liquidity, and the U.S. and Chinese economies are doing well," he said.

"In this environment, everybody is still forced to stretch for yield, which leads right into the EM deals we've seen over the last week."

On Wednesday, both Brazil and Jamaica issued new securities.

The Federative Republic of Brazil reopened its 8¼% bonds due January 2034 (B1/BB-/BB-) to add $500 million.

The reopening priced at 94 1/8 to yield 8.814%.

The bond continues to trade up in the secondary. During Thursday's session, the bond was bid at 94¾ bid, up 0.35 and 5/8 better than its issue price.

Bear Stearns and Deutsche Bank ran the re-opening of the global bonds.

And the government of Jamaica priced an upsized offering of $300 million in 10-year bonds (B1/B) at 99.191 to yield 9 1/8%.

Bear Stearns was also the lead manager of that bond issue.

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