EM tightens again despite Treasuries pullback; Pemex adds $1.5 billion in retap of 2015, 2035 bonds

By Reshmi Basu and Paul A. Harris

New York, Jan. 26 - Emerging market debt continued to plow ahead Thursday as spreads tightened to another historic low even as the yield on the 10-year note stabbed 4.52%.

"Nothing is stopping this market," said a trader.

"Nothing seems to be able to shake its confidence. Even the mediocre performance of stocks and higher Treasuries have not curbed anyone's appetite for risk," he added.

In the primary market, state oil company Petroleos Mexicanos (Pemex) sold $1.5 billion in a retap of its bonds due 2015 and 2035 (Baa1/BBB/BBB-).

Pemex sold an additional $750 million of the bonds due 2015 at 98.889 to yield 5.89% and $750 million of the bonds due 2035 at 99.26 to yield 6.682%.

At 3 p.m. ET prior to the pricing of the deal, the Pemex 2015 bond was spotted at 98.85 bid, 99¼ offered, down half a point, said another trader.

He added that much of Pemex's curve was down on the new supply. The Pemex bond due 2027 was spotted down 1¼ points to 132½ bid, 133½ offered.

Bookrunners were Credit Suisse, Lehman Brothers and UBS Investment Bank. Co-managers were Barclays Capital, Deutsche Bank and JP Morgan.

Also tapping the market, power generator Mirant Trinidad Investments of Trinidad & Tobago (Baa2/A-) priced a $100 million offering of 10-year bullet bonds at par to yield 7.017% or 250 basis points more than Treasuries via Credit Suisse.

Bear Stearns bullish on Brazil

Brazilian bonds rode higher, even as a lingering political scandal remains. Finance minister Antonio Palocci said he did not receive bribes when he was the mayor of the city of Ribeirao Preto from 2000 to 2002, responding to senators' questions on Thursday.

By session's end, the Brazilian bond due 2040 gained 0.15 to 129.90 bid, 130.05 offered.

"It's been an impressive rally," remarked Alberto Bernal, Latin America fixed income analyst at Bear Stearns.

Bernal added that there are two parts to this story: the endogenous story and the global liquidity story.

"Brazil's numbers are better. Debt to GDP ratio has fallen. Growth is not great, but it is positive," he said.

Furthermore, he said, the central bank's orthodox policies have pushed down inflation rates and there is a likelihood that the bank will cut rates more sharply this year, which is a good omen for Brazil's economy.

He said that Bear Stearns has identified Brazil as one of its best picks for 2006.

Meanwhile, Brazil along with most of Latin America votes this year. And there is a possibility that president Luiz Inácio Lula da Silva, weakened by last year's scandals, may lose his re-election bid.

But Bernal noted that even if Lula exits, policy could well remain intact under a new regime.

For instance, Jose Cerra, mayor of Sao Paolo and member of the social democratic PSDB party shares similar policy views with former president Fernando Cardosa.

"If Lula was to lose, we could even see a more pro-market policy being implemented in this country."

Peru's close election

Peruvian bonds shot up Thursday, The bond due 2012 added a quarter of a point to 115½ bid, 116½ offered The bond due 2015 gained 1.15 to 123½ bid, 124.35 offered and the bond due 2025 moved up 1.90 to 103¾ bid, 104.65 offered.

Presidential candidates Lourdes Flores and socialist Ollanta Humala are in a dead heat. As Humala's approval ratings have sprung higher in the polls, Peruvian bonds have come under selling pressure.

"Investors have been protecting themselves for quite awhile since Humala started to go up in the polls a couple of months ago," remarked Bernal.

"People have started to really pay attention to this story."

Nonetheless, a poll released Thursday showed that Humala's popularity on a national level has declined in the last week.

The market has used that to take a breather, replied Bernal, but he added that this does not mean the story is over.

"There's a possibility that Humala will be president of Peru. I don't think it's an overwhelming possibility, but a possibility nonetheless."

If he does emerge as victor, the outlook for Peru is bearish given that Humala is not market-friendly at all.

"As of now, the firm's [Bear Stearns] recommendation is to hold because the adjustment of prices was so significant. Since last week, we recommended shifting our position to an overperform on the Peruvian debt evaluation attractiveness."

Furthermore, valuations are tight in Latin America, said Bernal, adding that the markets are indeed overstretched.

"What will trigger an correction? The answer to that question remains the same as it was four of five months ago which is some kind of adjustment on the level of liquidity on the world economy."

If liquidity remains at the current levels, there is no reason for investors to reduce their positions.

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