Emerging market debt sees relief on Brazilian noise reprieve; Indonesia down

By Reshmi Basu and Paul A. Harris

New York, Aug. 25 - Emerging market debt saw tighter spreads Thursday as congressional testimony by a former aide to Brazil's finance minister appears to have done little damage to the minister's credibility.

So, for now, Brazil's political woes faded on testimony by Rogerio Buratti, a former aide to Palocci, who said he was paid off when he was mayor of the Sao Paulo State city of Ribeirao Preto.

Since the allegations surfaced last Friday, Brazilian debt has been volatile.

Buratti failed to be the smoking gun that many investors had feared.

Now it looks as if market-friendly Palocci will remain as finance minister.

Brazilian paper shot up in response. The Brazilian bond due 2040 moved up one point to 118 bid. Other Brazilian winners of the day included the bond due 2012, which gained 0.70 to 117.35 bid. The bond due 2020 added one point to 133 bid.

"In general, the fears regarding Buratti's testimony have been dispelled for the most part," said Enrique Alvarez, Latin America debt strategist for research firm IDEAglobal.

"That has allowed Brazil to bounce back somewhat. And I think that's where the action has been concentrated. If you look at the spectrum elsewhere in Latam, the changes aren't really that significant," he added.

Other gainers in Latin America included Mexico, which was yanked higher by U.S. Treasuries, noted Alvarez. The Mexico bond due 2034 added half a point to 107 bid.

And Ecuador and Venezuela saw higher prices as oil marked a new territory. During overnight trading, crude oil touched $68 per barrel. Oil prices closed up 17 cents at $67.49 on Thursday.

The Ecuador bond due 2012 added ½ a point to 99 bid while the bond due 2030 gained 1¼ points to 86¾ bid. The Venezuela bond due 2027 was higher by 0.20 to 106.05 bid.

Brazil story not over

The political maelstrom in Brazil may have calmed for now. But, as investors have learned, the corruption story has many legs. For three months, president Luiz Inacio Lula da Silva's Workers' Party has fought allegations of kickbacks.

Alvarez noted that the story has given fuel to the opposition party, as evidenced by the latest poll, which has Lula's approval rating slipping below 50%.

"This is a function of all that has been slung around. I would suspect that going forward, you should still see some more of this out there," he said.

The implications and allegations have all been in the same vein and with so much repetition, there must be some truth to it, he commented.

Looking ahead to Friday, a sell-off is likely as investors shield themselves from any negative weekend news, which has become a norm since the corruption scandal broke out.

"People short the market going home on Friday because you know it's not going to run away from you come Monday," Alvarez remarked.

Furthermore, he added that with high oil prices and an approaching Gulf storm, chances are that investors will short the market.

GM, Ford downgrades have little effect

Emerging markets brushed off a downgrade by Moody's. The agency cut the credit rating of Ford Motor Co. and General Motors Corp. to junk status on Wednesday. The move was expected.

Ford will now exit one investment-grade indexes in the United States.

"It could cause a little more noise," said Alvarez.

"The overall high-yield sector in the U.S. has been dormant for quite a while. It's been trading essentially sideways and that's beneficial to Latin America.

"As long as that [high yield] remains quiet, the crossovers into Latin America are not under pressure to sort of trade out of risk in order to compensate for any movement in high yield," he said.

The benign reaction to the downgrades is good news for the region, but there may be more fallout down the road.

Indonesia down

Indonesia has seen its sovereigns tumble as its currency comes under attack from high oil prices. In order curb the weakness in the currency, the country will need to implement measures such as tighter monetary policy and an increase in domestic oil prices.

Nonetheless, the sell-off may create opportunities to buy, said a market source. The source added there will be more volatility and weakness in sovereign prices in the middle-term, but that should provide entry points for buyers.

Furthermore, spreads are expected to widen as the government is expected to tap the capital markets.

Indonesia submitted request for proposals for a benchmark-sized sovereign bond offering.

During the session, the Indonesia bond due 2014 was down 1.63 to 96 3/8 bid while the bond due 2015 fell 1¼ points to 97 3/8 bid.

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