Brazil bonds up again, 2040 hits 112; CSN, Norilsk Nickel price new deals

By Reshmi Basu and Paul A. Harris

New York, Sept. 17 - With investors eyeing Tuesday's Federal Reserve meeting, emerging market spreads tightened as Brazilian paper surged.

"Brazil rallied and '40s broke the 112 handle," said a Latin American debt strategist at Refco EM.

"And Venezuela had quite a positive day today [Friday]. The '27s are trading on the 99 handle."

"The locals have been buying very heavily, which is very positive," he said.

"The hedge funds are taking positions. I haven't seen any profit-taking yet," he added.

During Friday's session, the Brazil C bond added a quarter of a point to 99¼ bid while the bond due 2040 gained ¾ of a point to 112.10 bid.

The Venezuela bond due 2027 was bid at 99, up 0.05.

Overall, emerging market paper inched higher. The JP Morgan EMBI+ Index was up 0.03%. Its spread to Treasuries tightened six basis points to 415 basis points.

Those gains came after a strong performance on Thursday when the EMBI+ jumped 0.56% while its spread to Treasuries tightened one basis point to 421 basis points. Brazil was also a big winner Thursday. The C bond rose 0.687 to 99.062 bid while the bond due 2040 added 2.15 points to 111.45 bid.

Russian, Brazilian corporates price

In primary action, Russia's Norilsk Nickel priced $500 million bonds due 2009 at par to yield 7 1/8%.

Books for the massively oversubscribed were around $2.4 billion, according to a market source.

Citigroup and Morgan Stanley ran the Regulation S deal for Russia's largest metal producer.

And out of Brazil, CSN Islands IX Corp. priced $200 million notes due 2015 (B1/B+/) at 99.886 to yield 10%.

Citigroup was the lead manager for the Rule144A/Regulation S (with registration rights) offering.

CSN Island is a subsidiary of Brazilian steelmaker Companhia Siderurgica Nacional.

Profit-taking?

Looking ahead, profit taking hitting the market before Tuesday's Federal Open Market Committee meeting would be a logical step, but may not happen, according to the Refco EM strategist.

"By experience, once this market has some momentum, they seem to go over what is prudent in terms of profit-taking and they just let it rally for a little while," he said.

"The market believes that there is still some room for improvement in terms of prices."

"I'm not very sure if there is going to be some profit-taking. I'm assuming there would be right before the meeting. But the comments I'm hearing on the other side is that people want to let the positions run a little bit more," he added.

Time for downtrade, says investor

However, one investor is taken aback by how strong the emerging market rally has been over the last few weeks.

"I'm very surprised at the direction the market is taking," said Steve M. Hope, managing partner for Outrider Management.

"I continue to be surprised by the strength of the market.

"I think that people are looking at inflation numbers and the de-acceleration of economic growth and not crediting absolute levels of economic growth and interest rates," he added.

Hope expects the Fed to raise rates by 25 basis points on Tuesday, in line with market consensus.

"And I really would expect them to keep raising interest rates by 25 basis points every meeting until till they get to between 2% and 2½% on overnight rates," he added.

"I don't think that is particularly aggressive."

Overall, Hope holds a short duration position. He is short in sovereigns and long in corporates.

"It's hard to tell what the real impact in either interest rate movements in the U.S. or EMBI spreads widening or tightening is on my portfolio because it most directly and visibly impacts my short position such as the big liquid sovereigns," he noted.

"But it tends to be the case that the corporate positions which I have invested in also move along with those.

"On a mathematical basis, because the defaulted debt has no duration, I'm pretty sure I have a negative duration," he told Prospect News.

"But realistically, the portfolio doesn't seem to move that much due to interest rates."

Furthermore Hope would prefer to see an orderly downtrade in the market than the blowout rally seen in the last two months. He believes a market correction is unavoidable.

"For all the positive press that Brazil has gotten, I'm not sure that their fiscal position is dramatically better than what it was two years ago or four years ago - although it is somewhat better," he noted.

And in terms of the carry trade, when there is more credit in the system because of low rates, balance sheets are bigger.

"And assets get put on those balance sheets, so in effect there is a carry trade inevitably when rates are low," Hope said.

"And as rates rise, balance sheets shrink because the stock of money falls.

"And so asset prices on the whole should fall. And to the extent that there are people who are borrowing money at low rates and holding assets, some of those people are going to get squeezed out because they won't be able to continue to borrow.

Unwinding of the carry trade was partly blamed for the bloodshed that occurred in the spring as investors panicked over the direction the Fed would take.

"I am skeptical that the market needs to have the kind of horrific downtrade that it had in April and May, but at the same time, I believe that the market should be trading down," Hope said.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.