Emerging market debt resilient despite equities decline; Brazil up on election run off

By Reshmi Basu and Paul A. Harris

New York, Oct. 2 - Emerging market debt was stable Monday despite lower U.S. equities and declining commodity prices. A bounce in U.S. Treasuries on the back of a weaker-than-expected ISM manufacturing survey helped cushion the market.

At the end of the session, the spread on the JP Morgan EMBI Global Index was tighter by one basis point versus Treasuries.

Brazilian bonds gained following news that president Luiz Inacio Lula da Silva would face off against a business-friendly opposition candidate in the second round.

Both local and external markets gained after center-right Geraldo Alckmin, the former governor of Brazil's richest state, Sao Paulo, showed an astonishingly strong performance in Sunday's election.

Silva nabbed 48.6% of the vote, just barely missing the 50% plus one vote needed for an outright victory. Alckmin received 41.6% of the vote. And they will both face the voters again on Oct. 29.

"Markets see the run off as a win-win situation," said a market source.

"Whoever wins, economic policy should stay intact," he noted, adding that Alckmin would be in better position to pass labor and tax reforms.

Lula's Workers Party has been recently caught up in political maelstrom involving allegations of a scheme to purchase documents meant to discredit the opposition party. Some polls had showed Lula losing support leading up the election.

Meanwhile there were investor fears that the fallout from the graft probe as well as from other scandals would impede his ability to push ahead with economic and structural reforms.

Almost every investor had been hedging their bets on a on a first-round win for Silva, but in the Friday session ahead of Sunday's poll few took positions in case there were any surprises.

But this election surprise turned into a market blessing as Alckmin is seen as the more market-friendly candidate, noted sources.

On Monday, Brazilian bonds moved higher. During the session, the bellwether Brazilian bond due 2040 added 0.35 to 130.65 bid, 130.70 offered.

Argentina up on ratings boost

In other news, Argentinean bonds traded up after Standard & Poor's raised the country's long-term credit ratings to B+ from B, citing lower debt burdens. On that news, its spreads tightened by 5 basis points, making it the session's best performer.

Discount bonds were about ¼ point higher following the news, noted a trader.

Elsewhere, Ecuadorian bonds were a tad higher on news that the government would not call the remaining bonds due 2012s on Nov. 15.

In trading, the Ecuadorian bond due 2012 was unchanged to 100.20 bid, 100.50 while the bond due 2030 was up 0.10 to 92.10 bid, 93 offered.

Overall the market still has very little conviction, noted another source, who added that local markets are getting more play than external markets.

"Most people look to be neutral," he said, referring to external debt positions.

"I just read that dedicated investor positions and crossover account exposures are at a record low," he said.

"Still hard to find value in this market."

Matahari brings back deal

On the primary issuance front, Indonesian retailer PT Matahari Putra Prima TBK sold $150 million in a resurrected offering of three-year notes (B1/B+) at 98.731 to yield 10%.

In June, the issuer attempted to sell $150 million in five-year bonds, for which guidance was set at 9% area. The deal was shelved due to market volatility.

This time around, the price guidance was upped to 10% to attract more orders, said one source.

The total book amounted to $350 million and was distributed over 60 accounts. Asia accounted for 53% of the distribution, followed by Europe with 37% and offshore U.S. accounts with 10%.

UBS and Credit Suisse managed the Regulation S sale.

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