Emerging market debt trades lower; Indonesia may tap bond due 2015

By Reshmi Basu and Paul A. Harris

New York, Aug. 26 - Emerging market debt drifted lower Friday as investors sold off Brazilian bonds to insulate themselves in case any new corruption allegations pop up over the weekend.

"The session was pretty quiet," said a trader, who added that summer sloth has fully kicked in.

"There really is no one around. The market will most likely trade in tight ranges."

In the primary market, the Republic of Indonesia is considering doing a tap of its dollar-denominated 7¼% global bond due April 20, 2015 (B2/B+), according to a market source.

On April 13 Indonesia priced $1 billion of the 7¼% notes due April 20, 2015 at 99.127 to yield 7.375%. Citigroup, Deutsche Bank and UBS led the deal.

Earlier last week Indonesia submitted a request for proposals seeking an investment bank to manage the sale of a dollar-denominated global bond.

Brazil down

Since the corruption scandal broke out in June, it has become customary for investors to short the market in case any new allegations surface over the weekend. And this Friday was no exception. The Brazilian bond due 2040 fell 0.45 to 117.55 bid. The bond due 2012 slipped 0.30 to 117 bid while the bond due 2030 lost one point to 130.70 bid.

"Just when you think it's over, there's a new headline," said a trader.

"Everyone is on the defensive. No one wants to be caught off-guard."

Nonetheless, the market is carrying a better tone into the weekend, as Brazilian political jitters are receding for now, said an analyst.

"Thursday's testimony was key because [finance minister Antonio] Palocci is still in. Without him, the government would have to convince investors that it would continue with economic discipline.

"The market is never happy when a market-friendly guy leaves," added the analyst.

As for now, Brazil's political concerns were quieted 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.

His testimony failed to produce a smoking gun.

Mexico lowers rates

Mexico's central bank pushed interest rates lower on Friday, the first cut in over three years as the bank moved in hope of nudging the stalling economy. The bank said it would permit a 25 basis-point dip in the overnight lending rate.

The action reduces Mexico's overnight loan rate to 9½% from 9¾%.

"This signals a change in fiscal policy," said the analyst.

During the session, the Mexico bond due 2009 was unchanged at 117.70 bid while the bond due 2025 added a quarter of a point to 160¾ bid. The bond due 2034 lost 0.15 to 106.85 bid.

Meanwhile the trader said that Asian credits were softer on the day. Malaysia's bond due 2009 slipped 0.46 to 113.958 bid. Energy provider Tenaga Nasional's 7 5/8% bond due 2011 slipped 0.22 to 113.067 bid. Oil and gas company Petronas' 7 7/8% bond due 2022 lost 0.54 to 125.373 bid. The Thailand bond due 2012 dipped 0.16 110.622 bid.

However, the Philippines emerged as a winner. The bond due 2025 gained 0.37 to 112.87 bid.

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