Emerging market spreads wider; Chexim reopens 10-years; Venezuela lower despite S&P upgrade

By Reshmi Basu and Paul A. Harris

New York, Aug. 25 - Emerging market paper was softer Wednesday as profit-taking hit the market.

Meanwhile longer term U.S. Treasuries ended the day higher on soft economic data.

U.S. orders for durable goods rose 1.7% in July, but there was concern that most of the gains were from one sector.

And new home sales in July fell to 6.4% to a 1.134 million annual rate, the slowest pace since December.

The 10-year Treasury note ended the day at a yield of 4.27%

Emerging markets debt was lower. The Russia bond due 2030 was down 1.313 to 94.062 bid. The Philippines bond due 2016 was bid at 961/2, down 1.375. And the Ecuador bond 2030 was down 1¼ points to 77 bid.

Meanwhile in primary action, Export-Import Bank of China priced an add-on to its bond due 2014 at 100.294 to yield Treasuries plus 93 basis points via HSBC.

The addition brings the total issue size to $1 billion.

On July 23, Chexim priced a downsized $750 million offering of 10-year global bond at 98.921 to yield Treasuries plus 93 basis points via Citigroup, Deutsche Bank, Goldman Sachs & Co. and HSBC.

Venezuela down despite S&P upgrade

Venezuela's debt was down despite a ratings upgrade from Standard & Poor's during Wednesday's session. Its bond due 2027 was down 0.80 to 92.95 bid while the bond due 2034 was bid at 92.100, down 0.900.

Standard & Poor's raised Venezuela's foreign currency debt rating to B from B-. Record-high oil prices and president Hugo Chavez's win in a recall vote should ensure that the Latin American country will pay its debts, said S&P.

"The upgrade doesn't come as a surprise," said a debt strategist at Refco EM. "The country has shown signs of recovery on the economic side."

As the uncertainty due to the referendum process subsides, the upgrade reflects the country risk.

"Venezuela is a net exporter of oil and as long as the price of oil is above the projected budget deficit in the country, the economy should benefit from these prices," he added.

"But there has not been a lot of activity in Venezuela yesterday [Tuesday] and today [Wednesday]," the Refco strategist noted.

Brazil down

Rumors of a possible upgrade to Brazil resurfaced Tuesday, giving a lift to its paper - but Standard & Poor's put out an announcement confirming its rating and that put an end to the boost. Standard & Poor's affirmed its B+ long-term foreign currency, BB long-term local currency, and B short-term local and foreign currency sovereign credit ratings for Brazil in order to dispel the upgrade chatter.

"Today, [Wednesday] it's a little softer," said the strategist. 'You see some of the longer bonds trading lower.

"I think the uncertainty here is how high can Brazil go. And I believe it still has some room to go higher.

"It all depends on what is the overall tone in fixed income and how that could influence the prices locally, but I think there is still some room for higher prices," he added.

The Brazil C bond lost 0.563 points to 96.812 bid while the bond due 2040 was bid at 104.90, down 1.35 points.

Brazil can still aim higher, if U.S. economic growth continues to decelerate, according to a buy-side source.

"The Brazil story is a very good one," said the source. "They are working hard. They have still have imbalances in the economy but things are going in the right direction for them."

But the underlying problem for Brazil is U.S. interest rates, the source said.

"The fears we had before have abated and probably are unlikely to return with the same kind of strength because people have redefined the growth envelope for the United States," he added.

"The question is what is priced into the market at this point. And it is hard to say. U.S. Interest rates are no longer wind blowing at our back.

"And Brazil is pretty fully priced, but the fundamentals are still good," he noted.

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