Emerging market debt continues slide on Brazilian troubles; Mexico sells €750 million bonds

By Reshmi Basu

New York, June 7 - Emerging market debt continued to sell off as corruption allegations in Brazil remained a headlining story. Nonetheless, a solid performance by U.S Treasuries has helped insulate the market somewhat.

In the primary market, the United Mexican States priced €750 million of 10-year bonds (Baa1/BBB/BBB) at 99.505 to yield 4.312%, a spread of mid-swaps plus 107 basis points.

Barclays Capital and UBS Investment Bank ran the deal.

The deal was "timed well," given Mexico's recent performance, a market source commented.

This will be the only euro-denominated bond issuance this year from Mexico, given the country's low funding requirement, according to an investor note.

Also, Mexico's entertainment company Corporacion Interamericana de Entretenimiento SA de CV priced $200 million of 10-year bonds (Ba2/B+ (expected)) at 99.187 to yield 9%.

Proceeds from the sale will be used to repay existing debt.

Citigroup was the lead manager for the Rule 144A/Regulation S offering

Brazil down again on corruption charges

Brazilian paper continued its sell-off as Brazilian President Luiz Inacio Lula da Silva tries to shakes off a corruption scandal.

In a published report Monday, Roberto Jefferson, chairman of the government-allied Brazilian Labor Party, accused Lula's Workers' Party of paying a "monthly allowance" to a number of legislators in exchange for support of government-backed legislation.

"We've seen a sell-off in the past few days, starting Monday with new news on the corruption," said a buyside source.

"I think the market probably has more to go," said the source.

"The initial reaction was a sell-off. If things continue to unravel and the allegations actually have foundation, it looks like we're going to sell off some more."

During Tuesday's session, the Brazil C bond fell 3/8 of a point to 101.407 bid. The bond due 2040 was spotted at 118.20 bid, up 0.20 intraday but closed the session at 117.40 bid, down half a point.

Low Treasury rates cushion decline

Overall, emerging market debt was weaker Tuesday, but continued the low level of U.S. Treasury yields has helped ease some of the pressure, said sources. With the 10-year note still trading below 4%, the higher yields on offer in emerging markets have caught investors' attention.

The yield on the 10-year note stood at 3.91% in late trading Tuesday, down from 3.96% on Monday.

"Rates are low, so that's helping to soften the noise in Brazil," said a trader.

During Tuesday's session, the Mexican bond due 2009 slipped 0.10 to 119½ bid. The Venezuelan bond due 2027 fell 0.70 to 100.30.

Illiquid issues such as Panama and Peru were also down. The Panama bond due 2027 dropped one point to 118 bid. The Peru bond due 2012 slid three-quarters of a point to 118 bid.

Meanwhile, Russia and Turkey were firmer on the day. The Russian bond due 2030 was up 0.182 to 110.62 bid. The Turkish bond due 2030 gained 1¼ points to 141¼ bid.

"We've been weaker in reaction to being stronger in the last few weeks. But overall, it's surprisingly strong," remarked the buyside source.

"It seems like most of the flows have been Street driven," said the source.

And in Brazil, "mostly locals, hedge funds and trading accounts are playing at this point."

Looking ahead, the buyside source is concerned over the health of the economy in the United States, which could derail emerging markets.

"I think liquidity will be a little bit drier over the summer months, so that's something to watch for," said buyside source.

"And growth in the U.S. or lack of growth in the U.S. will be a main driver," said the source.

Also, the performance of credit markets will determine the strength of the market.

"If we start seeing concerns about the start of a recession in the U.S., that will have a bad effect in EM."

Dominican Republic's IMF review delayed

The Dominican Republic government announced late Monday that the completion of the first review under the country's current stand-by agreement with the International Monetary Fund would be postponed until late July.

Loose ends such as the reconciliation and adjustment of some "fundamental numbers" held back the completion of the review process, according to an analyst note.

The government plans to tweak its preliminary economic estimates for the first quarter as well as push ahead on a new letter of intent, reported the analyst.

Keeping with this time schedule, IMF officials could start reviewing documents as early as next week.

The analyst said that while delays are not unusual, the delays have the potential to create uncertainty. The government's ineffectiveness to produce the necessary conditions to finalize the review coupled with the readjustment of preliminary estimates for the first quarter could support assertions by the private sector that the government may have miscalculated some of its initial performance estimates.

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