Greenspan's comments spark sell-off in emerging markets; rumors of Brazilian reais deal on Tuesday

By Reshmi Basu and Paul A. Harris

New York, Nov. 19 - Emerging market debt was softer Friday on comments made by Federal Reserve chairman Alan Greenspan about the unhealthy state of the U.S trade deficit, which, he said, if allowed to continue, will make the U.S dollar less attractive to foreign investors.

Also making news, a local Brazilian newspaper reported that the country would tap the market on Tuesday with a local currency denominated issue.

Comments made by Greenspan on Friday rattled emerging market debt.

"It seems persuasive that, given the size of the U.S current account deficit, a diminished appetite for adding to dollar balances must occur at some point," Greenspan told an audience at a conference on the euro in Frankfurt.

Those words had a jarring impact on the U.S dollar and the U.S Treasuries market. The euro was up 0.8% at $1.356. The pound also gained 0.5% to $1.8581.

"You had Mr. Greenspan, to a certain degree, let loose and basically say that strong dollar policy may not be exactly what is to be expected," said Enrique Alvarez, Latin America debt strategist for think tank IDEAglobal.

Treasury prices took their sharpest plunge in two weeks as Greenspan warned of an environment of increasing rates.

"Rising interest rates have been advertised for so long and in so many places that anyone who has not appropriately hedged his position by now, obviously, is desirous of losing money," he said.

The yield on the 10-year note stood at 4.21% by the end of trading, up from Thursday's 4.12% close.

As the dollar and Treasuries were dinged, emerging market debt was also assailed during Friday's session.

"It was a pretty volatile day," said a trader. "After Greenspan spoke, the market took a huge dip and then traded back for a while. We came back," he said.

"Brazil '40 is down ¾ of a point, so it wasn't too bad - outperformed Treasuries on the day," he said.

"Monday comes in, we'll hang around at these levels. It's going to be a short week because of the Thanksgiving holiday. I wouldn't expect much volume," he added.

During Friday's session, the Brazil C bond fell 0.313 to 100.062 bid.

The Venezuela bond due 2020 slipped 1.3 to 102¾ bid.

"As soon as you saw the dollar enter more volatility and come back over towards $1.30 and then move out, I had the clear impression that with Latin America people were trying to get short real rapidly and then as the day progressed, they sort of covered," said Alvarez.

In the past sessions, Latin American currencies have tracked the U.S dollar. But as the dollar was squeezed, the 10-year Treasury gave way and went in the reverse direction, said Alvarez.

"The reversal in the Treasuries essentially hit the Latin American markets," he said.

"There was less buying pressure and we actually had profit taking.

"That reversal also affected debt markets. I think there was less of a reason to keep buying risk and that's what capped the market today [Friday]."

Paper from Russia and Turkey were also down. The Russian bond due 2030 slid 7/8 of a point to 101¾ bid. Turkey's bond due 2009 was down a quarter of a point to 124¾ bid while the bond due 2030 was down a quarter of a point to 140½ bid.

Report that Brazil will tap Tuesday

Meanwhile, local newspaper Estado de Sao Paulo reported that Brazil would come with the new issue denominated in reais next Tuesday, led by Citigroup, according to an investor note sent out Friday.

The issuance is expected to be the equivalent of $1 billion with five- to seven-year maturities.

"Assuming today's [Friday's] sell-off is not part of something more painful, I think the BRL-denominated deal should do very well," said an emerging market analyst.

"There are lots of hedge funds who would like an easy, liquid way to play in EM local markets and this should satisfy some of that demand.

"We've seen that with the new Colombian peso bond, where hedge funds have been especially interested."

On Nov. 9, the Republic of Colombia priced an upsized $375 million equivalent of global notes due 2010 (Ba2/BB/BB) at 99.658 to yield 11 7/8% via Citigroup.

"The only issue is that in Brazil the real has already appreciated a lot versus the dollar, so the local currency does not offer as much value as it once did," he said.

"If the real remains around current levels and inflation comes under control, the Central Bank is going to resume buying USD to build up international reserves, and that would force a weakening in the real.

"That probably won't happen for another few months - if it happens at all, so I expect some investors will be happy to try the new BRL bonds for a few weeks."

Friday's volatility should pose little threat to the success of Brazil's local currency launch.

"There seems to be appetite out there for high-yield paper in general.

"The high-yield market in the U.S continues to be well bid.

"What that means, markets are receptive to all types of high yield paper. I would be surprised if the deal was not well received," he noted.

But liquidity does dry up as U.S investors take off for Thanksgiving, which may decrease the investor pool, said Alvarez. And then December is upon us.

"I think we are going to have very similar parallels to last year where Latam EM just kept on going higher and higher - above anyone's expectations.

"It's just a function of the excess liquidity that is out there and that U.S Treasuries just don't want to break beyond 4.25% to the upside," said Alvarez.

MegaFon, Woori Bank hit the road

In primary news, Russia's MegaFon will start a roadshow for its debut note offering (B2/B+) of up to $375 million on Wednesday in Asia and Europe. The deal is being brought to market via Citigroup and ING.

"MegaFon appears to be going out a little earlier than expected on the momentum of Fitch upgrade of Russia to investment grade," said a buyside source.

"Another thing that a lot of people don't seem to have picked up on is that Merrill Lynch is going to add Russian corporates to their Global High Yield portfolio," he added.

MegaFon, based in Moscow, is Russia's third largest mobile phone company.

Korea's Woori Bank will begin a roadshow for its expected $300 million of five-year subordinated bonds on Thursday.

The roadshow will hit Singapore, Hong Kong, London and New York.

Barclays Capital and Merrill Lynch are running the proposed issuance for the Seoul-based financial institution.

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