Brazil stages late week relief rally; Lithuania expected with euro-denominated deal

By Paul A. Harris

Portland, Ore., May 19 – The corruption scandal surrounding Brazil President Michel Temer rattled Brazilian bonds, the currency and the Bovespa on Thursday.

However there was a relief rally underway heading into the end of the week, according to a portfolio manager.

With Brazil stocks up 2.5% or more on Friday and big equity names like Vale SA rallying, Brazil credit default swaps were 5 basis points tighter early Friday afternoon, and 20 bps tighter relative to Thursday’s close.

Brazil’s dollar-denominated 7 1/8% notes due January 2037 were up 1.75 points on the morning, at 113¾ bid, 114¾ offered.

Petroleo Brasileiro SA bonds, which had been rallying on the back of very strong earnings numbers, took a substantial hit on Thursday, but were crawling back on Friday, a trader said.

The new add-on to the Petrobras’ 6 1/8% notes due 2022 was 103 bid at mid-day Friday, up from 102½ bid at the open.

The deal priced at 105.14 in a $1 billion tranche on Monday, as part $4 billion of combined add-ons that also saw taps of the 7 3/8% notes due 2027 and 7¼% notes due 2044.

Spotting Brazil CDS at 249 bps bid, early Friday afternoon, the trader noted that they had recovered from wides of 275 bps bid on Thursday.

The Brazil news may not be as bad as the press makes out, the trader said.

News reports have Temer caught on tape endorsing the payment of hush money to a politician convicted of taking bribes.

However the tapes are said to be of poor quality, according to the trader.

Temer, who replaced former president Dilma Rousseff – who was impeached in a bribery scandal – presides over an economy that has been struggling for the past half decade, sources recount.

Temer, who has been attempting to bring into place pension reforms, does not enjoy a great deal of popularity among the Brazilian people, which can hardly help him in his present predicament, the trader noted.

As to collateral damage, Argentina bonds were more impacted by the Brazil situation than those of other Latin American countries, owing to the fact that Brazil and Argentina have trade relations.

Lithuania

In the week ahead, Lithuania is expected to capitalize upon recent positive market sentiment and show up with a dual-tranche euro-denominated deal, as the market awaits stability before a CES deal calendar materializes, a source said.

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