Emerging market debt tracks U.S. equities as FOMC starts; Brazil retaps 2027 reais bonds

By Reshmi Basu and Paul Deckelman

New York, March 20 - Emerging market debt was solid Tuesday as it traded in tandem with a rallying U.S. stock market, but many investors remained sidelined as the Federal Reserve began its two-day meeting.

In the primary market, the Federative Republic of Brazil sold an additional R$750 million or $362 million equivalent of local currency-denominated global bonds due 2028 (Ba2/BB/BB) at 993/4.

The pricing came in line with revised guidance, which was increased from initial talk of 99 5/8.

The deal is denominated in Brazilian reais while payments will be made in dollars.

Barclays Capital and Citigroup were joint bookrunners for the offering, which was registered with the Securities and Exchange Commission.

With the additional bonds, the total size of the deal stands at R$2.25 billion.

In February 2007, the country sold R$1.5 billion of the original 21-year global bonds at 96.451 to yield 10.68%,

Elsewhere Inter-American Development Bank sold a $500 million offering of three-year bonds (Aaa/AAA) at 99.954 to bear a coupon of 4¾%.

Morgan Stanley and Royal Bank of Canada managed the transaction.

IADB is a regional development bank for Latin America and the Caribbean.

EM scores gains on equities

Returning to secondary trading, emerging market debt recorded another positive day, bolstered by solid returns in the U.S. equity market.

During the Asian trading session, Asian credits were quiet, in spite of the introduction of new launched iTraxx indexes, which are updated every six months. The new CDS rolls triggered a pick up in trading activity, but many investors remained sidelined ahead of Wednesday's interest rate decision by the Federal Open Market Committee.

During the Asian session, the Philippines benchmark bonds were quoted unchanged on the day at 97.25 bid, 97.5 offered. Five-year CDS contracts were quoted at 127-130 bps, several beeps tighter than the levels they had held during Monday's trading.

By the time New York trading rolled around, volumes still remained light. The sector was firmer on a dollar basis as U.S. stocks advanced on the back of speculation that there will be more corporate mergers to come. However, emerging markets was unchanged on a spread basis as it was unable to outstrip the rally in U.S. Treasuries.

The widely followed JP Morgan EMBI+ Index was unchanged at 179 basis points late in the session.

Among other benchmark names, the Indonesian bond due 2015 was unchanged at 107.75 bid, 108 offered. And the Turkish bond due 2030 added 0.25 to 153.75 bid, 154.25 offered.

Ecuador outperforms

Moving to Ecuador, finance minister Ricardo Patino said that the Andean nation would make the May 15 coupon payment on its global bonds due 2012.

The comments helped the volatile country outperform the broader asset class. During trading, the Ecuadorian bond due 2030 moved up 0.25 to 86 bid, 87 offered.

Meanwhile Venezuela was unable to extend Monday's rally as it saw its spreads widen by 1 bp.

In other news from the Latin American country, finance minister Rodrigo Cabezas said that state oil company PDVSA will sell $4 billion in foreign currency bonds to locals, according to a market source.

That sum is above the $3 billion previously announced.

The deal is expected to take place in the next few weeks, according to local reports.

Brazil remains firm

Among specific Latin American issues, Brazil's dollar-denominated benchmark 2040 global bond, remained firm, hitting an all-time intra-day high price of 134.313, versus Monday's close at 134.188.

On the shorter end of the curve, Brazil's global 7 7/8% bonds due 2015 likewise improved, to 113.08, up to 113.08 from 112.88 on Monday, as the yield fell to 5.76% from 5.79%.

On the other hand, the yield on Brazil's zero-coupon, real-denominated bond due 2008 - considered the benchmark security in the local-currency market - widened slightly to 12.11%, up 1 bp, as Brazil's treasury said that it would sell an additional 750 million reais of its existing 10¼% real-denominated bonds due 2028.

Mexico eases

Turning to Mexico, its 6 5/8% global bonds due 2015 eased slightly to 107.90 from 108.25 previously. The country's peso-denominated bonds meantime firmed as the currency unit climbed to its highest level versus the dollar in three weeks. The 8% peso bond due 2015 was quoted at 101.56, up 0.41 on the session.

Colombia's 11% peso-denominated bonds due 2020 were seen up 0.677 to 109.524, helped by the local currency's rise to a six-year high in the wake of last week's news that Brazil's Grupo Votorantim had agreed to acquire a majority stake in Colombia's largest steelmaker, Acerias Paz del Rio SA.

Dollar flows into the country in the wake of the sale are expected to increase, strengthening the peso and the bonds.

Transener slides

Moving to more corporate news, Argentinean power transmission company Transener saw its bonds dip following Friday's headlines that the Argentine division of Petrobras would sell its 50% stake of Transener to Argentina's state energy firm Enarsa and another local firm.

During the session, Transener's 8 7/8% bonds due 2016 slid 1.75 to 99.50 bid, 100.25 offered.

Asian credits quiet in New York trading

A New York-based trader in Asian issues opined that "literally, nothing happened today [Tuesday]," with the financial markets largely becalmed as participants await the outcome Wednesday of the two-day Federal Open Market Committee meeting.

"Clients were mum ahead of the FOMC and the Street was not incredibly anxious to push the market around, given the uncertainty over what [Federal Reserve chairman Ben] Bernanke is going to do [Wednesday]. So there was not a single Street trade in Asia." He also saw no movements in spreads against Treasuries.

He said that the paucity of activity "had nothing to do" with the fact that CDS contracts on underlying debt were rolled over on Tuesday. "If anything CDS [contracts] would have been the first thing to trade, if anything would - but things were just incredibly quiet during the course of the day."

He added that overall, "the market, if anything had a pretty good tone in Asia, with equities firm for the most part of the day - but again, without a lot of client involvement and huge uncertainty about [Wednesday]. People were just standing pat."

In corporate trading in Asia, bonds of AES Corp.'s Chinese affiliate were quoted as much as 3 points lower to 97 bid, down from par previously, after its Arlington, Va.-based corporate parent said Monday that it would have to restate some results due to accounting problems.

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