Emerging market debt down; Brazil down on Meirelles resignation speculation; $69 million outflows

By Reshmi Basu and Paul A. Harris

New York, Aug. 5 - Emerging market drifted lower Thursday as Brazil fell on concerns that central bank president Henrique Meirelles may be forced to resign after a local magazine reported new allegations over what is said to be his failure to disclose an offshore account.

"Mierelles brought down Brazil," said a buyside source.

"The rest of market seems mixed," the source added.

Veja magazine reported on its website allegation that Meirelles did not disclose to tax authorities a U.S. bank account that allegedly was used for a transfer to a Sao Paulo-based money changer.

Both Meirelles and former monetary policy director of Brazil's central bank Luiz Augusto de Oliveira Candiota have been under investigation over allegations of tax fraud and other illegal financial transactions.

Candiota denied any wrongdoing but resigned in late July in a move he said was intended to protect the image of the Central Bank.

In response Brazil's debt was down in trading Thursday. The Brazil C bond was down 0.751 at 93.312 bid while the bond due 2040 fell 1.4 to 96½ bid during Thursday's session.

Overall, emerging market debt was down. The JP Morgan EMBI Index fell 0.16%. Its spread to Treasuries widened two basis points to 469 basis points.

Meanwhile in primary news, the United Mexican States reopened its floating-rate notes due 2009 (Baa2/BBB-), selling an additional $500 million via JP Morgan.

The add-on to its bond due Jan. 13, 2009 priced at 101.10 to yield Libor plus 44 basis points.

The $500 million tap brings the total deal size to $1.5 billion.

One investor said the "deal was too tight" for them to participate.

"But Mexico came in at a good time, sneaking in before Friday's payroll numbers," the source said. "The deal went really well."

Mexico price the original $1 billion of bonds on Jan. 6, 2004 at par to yield plus 70 basis points.

From Asia, Export-Import Bank of Korea priced an upsized $500 million of five-year notes (A3/A-/A-) at 99.263 to yield 4.667% or 106 basis points over Treasuries.

"Too high quality for me," commented the buy-side source.

UBS, Barclays Capital and Citigroup ran the books.

However Banco de Brasil pulled its planned offering of $350 million 10-year notes (Ba3/B+/B+) because of a lack of investors.

A second buy-side source said he was not surprised.

"People are really cautious. They don't want to be over-invested," he explained.

Credit Suisse First Boston and BB Securities were joint lead managers on the deal.

Banco do Brasil is a federally-controlled Brazilian bank.

$69 million outflows

Emerging market bond funds had outflows of $69 million during the week ending Aug. 4, according to EmergingPortfolio.com Fund Research. That marked 12 weeks of outflows out of the last 13. But year-to-date inflows are still $192 million.

Global bond funds received $46.6 million of inflows for six weeks of inflows out of the last seven. Year-to-date inflows amount to $2.6 billion or 3.6% of total assets.

Payrolls expected at 240,000

Investors are anxiously awaiting the release of Friday's non-farm payroll numbers. The numbers are expected to come in around 240,000.

On Wednesday, the employment component of the Institute for Supply Management non-manufacturing index fell to 57.4.

Those numbers correlate well with the non-farm payroll numbers.

"That could indicate a weaker than expected number," said the second buy-side source.

On the other hand, the number of people filing for unemployment insurance for the first time fell by 11,000 to 336,000 in the week ended July 31, the Labor Department said Thursday, which indicated that the payroll number may be a little stronger.

But taking the average, the number should fall within the expected range.

"We may get something close to that [240,000], probably a little bit under that, but not tremendously under that," said the second buy-side source.

"There's one thing that you can't deny - interest rates are going up," he said. "The question is how fast.

"And my feeling not throughout the year, but certainly when we started seeing clearly that interest rates would go up, is that you would get 100 basis points this year to a year-end of 2%.

At one point, the market was looking for a hike between 75 and 150 basis points for the year, which has since been scaled back to 100.

"It means if the number is what we expected, the market won't sell of much or rally much.

"If the number is large, then the market could sell off and say we are getting 125 basis points.

"It is inevitable that rates will go up," he added.

Whatever the results are, the first buy-side source said he is not changing his position.

"I'm not trading actively off of it. I've been underweight in emerging markets for a while.

"I'm not planning on changing that. It's really a function of value and what the risk is if the numbers are stronger than expected - a negative for emerging markets."

Furthermore, he said that the high price of oil is the real concern.

"I think oil is more of an important story that anything else."

Supply fears pushed the price of oil to a near record high Thursday. On Wednesday, embattled Yukos announced that the Russian government would allow the company to use its bank accounts to continue financing production activities.

But on Thursday, the government reversed the bailiff's decision, saying that Yukos could not use previously frozen funds to pay for day-to-day operations.

The government is seeking repayment of $3.4 billion in alleged back taxes for 2000.

"High yield and equities - oil has really hurt those sectors," said the first buy-side source.

"For the Mexicos, the Ecuadors and Russias, it is good news. For Brazil, it's neutral.

"High energy prices are generally not great for the global economy.

"It's probably more important for a country like Brazil. In the short-term, they increase the perception of risk and volatility is clearly a negative."

Brazil's rumors vanish

Meanwhile rumors of a planned new deal from Brazil appeared to have died down during Thursday's session, according to an informed source. On Wednesday, Brazil was rumored to be on the verge of tapping the markets with a new issue.

"I didn't hear it today [Thursday]. And it didn't make a whole lot of sense. It must have been someone testing it yesterday [Wednesday]," the source said.

"My sense is that they are waiting till September.

"They did the floater. And then they came back and did the '14 relatively quickly

"They probably feel that they only have a billion left in the year. They aren't in a hurry," added the source.

In July, Brazil sold $750 million of 10-year bonds via Deutsche Bank and Morgan Stanley.

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