Emerging market debt gains in thin trading; Brazil up although rate news is no surprise

By Reshmi Basu and Paul A. Harris

New York, June 17 - Emerging market debt was firmer in a light-trading day Thursday.

One trader described the day as "not too active" and "fairly quiet."

"Prices are up a little bit, but not too much volume," he said.

The JP Morgan EMBI Index rose 0.46%. Its spread to Treasuries tightened five basis points to 490 basis points during Thursday's trading.

Brazil's Central Bank's Monetary Policy Committee (Copom) voted unanimously to leave the Selic rate at a three-year low and maintained a neutral bias on Wednesday, a surprise to no one.

"The recent de-valuation of the reais, the increase in oil prices, and the expectation for higher inflation in the weeks to come, gave us an indication previous to the Copom meeting that they were going to hold interest rates steady," said a debt strategist at Refco EM.

"I don't think it comes as a surprise. It's not good news.

"The Central Bank has warned the market that their main objective is to keep inflation under control.

"Now looking ahead in the months to come, the Brazilian economy needs to grow, which it is showing in the recent numbers that it's achieving that objective.

"Now lower interest rates will benefit the economy even more," added the strategist.

But Gustavo Canonero, Deutsche Bank's chief economist for the Latin American sector, had a different view.

"It reflects an economy that is confirming evidence of a strong recovery," Canonero told Prospect News in response to the interest rate news.

He sees the bank's decision as good news for bondholders as it also indicates the threat from inflation is "marginal" (See report elsewhere in this issue)

Meanwhile, a trader said the country's senate is expected to vote against the government's plan to raise Brazil's monthly minimum wage 8.3% to 260 reais.

A strike against President Luiz Inacio Lula da Silva may signal a decline in his ability to push through legislation.

"This is a power play for Lula," said a second trader. "A defeat would be telling of how much real power he has."

However, Deutsche's Canonero again had a different view, saying he expects the measure to pass eventually.

Brazil's debt was up in trading Tuesday. The Brazil bond due 2006 was bid at 106.750 late in the session, up 0.15.

The bond due 2012 was bid at 991/2, up one and half points on the day, the bond due 2034 was bid at 74.6, up 1.6, and the C-bond was bid at 91.062, up 0.937.

CVRD unchanged

Companhia Vale do Rio Doce paper was unchanged in trading Thursday after declining Wednesday on news reports that it is in talks to acquire a controlling stake in Toronto-based Noranda, Inc. for as much as $3 billion.

Some investors believed that the $3 billion price tag was far too rich.

But during Thursday's session, CVRD steadied as investors are unsure what the acquisition could mean for CVRD, the world's biggest iron-ore producer.

"The market adjusted to the acquisition," said an emerging market analyst.

Russian paper firms up

Russian paper was firmer Thursday, as President Vladimir Putin said that the government does not want the country's second largest oil company Yukos to go bankrupt.

Yukos has been battling claims that it owes $3.4 billion in taxes. The company has repeatedly warned that if forced to play those claims, the company would sink.

Main shareholder Mikhail Khodorkovsky is on trial for alleged fraud and tax evasion.

"This was a way to calm investors," said the second trader. "You want this to be done with, but it's not the overpowering issue driving the market. But I think investors are keeping close tabs."

Russian paper gained. The Russian bond due 2005 was bid at 105.6, up 0.50.

The bond due 2007 was bid at 113.75, up 1.375, and the bond due 2010 was bid at 108, up 0.313 in late trading Thursday.

Also in news from Russia, JSC TransCreditBank expects to sell $120 to $150 million of eurobonds (long term credit rating B-) to finance investment projects.

The Russian Railways' Bank plans to debut its global issue in October or November.

Mexico corporate bonds stable

Mexican corporates have been relatively stable in the last week.

Mexico's biggest railroad company Grupo TFM's bonds due 2009 were quoted at 97 bid, 99½ offered Thursday, down ¾ point from 97¾ bid, 99¼ offered on June 9.

Satellite company Innova S de RL's bonds due 2007 were at 101 bid, 102½ offered, up slightly from 100¾ bid, 101¾ offered on June 9.

Industrial production company Cemex SA de CV saw its bonds due 2009 at 117 bid, 119 offered Thursday, little moved from 117¼ bid, 118¾ offered on June 9.

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