Emerging market debt rides higher as Treasuries end three-day sell-off; Fitch upgrades Russia

By Reshmi Basu and Paul A. Harris

New York, Aug. 3 - Emerging market debt moved higher Wednesday, fueled by multiple factors including the end of a three-day sell-off in U.S. Treasuries. Confidence boosters also included a pause in the Brazilian corruption scandal and a ratings upgrade for Russia.

In the primary market, the finance ministry of the Ukrainian Republic submitted requests for proposals to more than 20 investment banks, seeking managers for its proposed €600 million issue of 10-year eurobonds.

Proposals are due by Aug. 14. The deal is expected to come to market before the end of 2005.

Fitch assigns its BB- sovereign credit rating to the Ukraine.

And the Republic of Poland also submitted a request for proposals for a $1 billion issuance with a possible launch in September.

Bond's return cuts rates

Summer sloth has comfortably settled into the primary market as the pipeline dries up. But next week may see some new issues, especially if this week's remaining spate of economic data in the United States is positive, said a sellside source.

He said that market reaction to the announcement by the U.S Treasury Department that it was bringing back the 30-year bond demonstrates that there is a possible window of opportunity for issuers.

"Even as they announced it, the 30-year is four basis points tighter so I guess people might take the chance that rates have come a little back, so we might see something next week."

Sources said the comeback of a 30-year bond, after being shelved for five-years, would have an insignificant impact on emerging markets.

"The Treasury would have to significantly increase the planned amount of issuance to really upset the markets, and I think that's unlikely," an emerging market analyst said.

"They're aiming to stabilize the average maturity of outstanding U.S. debt, which simply means there won't be any more reduction in the average maturity.

"At the margin, it may mean that investors' appetite for risk could be very slightly reduced, but I don't think it will play a major role in the direction of EM spreads."

Good day in EM

During the session, emerging market debt tracked a rebounding U.S. Treasury market. In late trading, the yield on the 10-year note was pushed down to 4.30% from 4.34% on Tuesday.

"There was some tightening in U.S. Treasuries, so that drove prices up and that lead to some tightening in EM spreads," said the sellside source.

Furthermore, Brazil led the way as no new headlines surfaced in the "bribes for votes" scandal, said sources.

Brazilian paper saw relief Tuesday as a key member of the embattled Worker's Party denied corruption allegations. Investors were defensive ahead of testimony by former chief of staff Jose Dirceu on worries that president Luiz Inacio Lula da Silva would be implicated. Instead, the market was relieved when there was no smoking gun. That positive sentiment carried over into Wednesday's session.

The Brazil bond due 2040 was spotted at 118½ bid, up 0.85 in late trading. The bond due 2013 was quoted at 116¼ bid, up 1¼ points. The bond due 2034 was seen at 96¾ bid, up 1.10.

Russia gains on upgrade

Meanwhile, a ratings upgrade for Russia only added to the market's confidence, remarked a market source.

The Russia bond due 2030 was spotted at 111¼ bid, up half a point.

Fitch raised upgraded Russia's sovereign credit rating to BBB, citing the use of record oil revenues to cut public debt.

"The rating action is underpinned by a massive improvement in the government's financial ratios," said Sharon Raj, lead analyst for Russia, in a news statement.

"Against a background of real ruble appreciation, GDP growth of 5.5% and external debt prepayments to the IMF and the Paris Club of more than $17 billion, this should result in a decline in government debt to 17% of GDP by end-year, far below the BBB median of 36%."

Fitch is the first of the three ratings agency to put Russia two steps below investment grade.

"It's funny because it was expected that Moody's would give an upgrade to Russia, but then Fitch came out first," said the sellside source.

The move puts Fitch in the spotlight, said the source.

Meanwhile, Russia's intention to pay down its Paris Club debt may depress Aries debt.

Last July, Germany monetized $5 billion worth of the Paris Club bilateral debt owed to it by Russia in a deal sold under the name Aries.

"By Russia buying back Paris Club debt, it would have an effect on those [Aries] bonds. It's going to turn out to be a very good credit in the future, so that's going to drive the market in that part of the credit spectrum."

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