Brazil up on rate rise expectations, Selic increased after market close

By Reshmi Basu and Paul A. Harris

New York, Sept. 15 - Brazilian bonds rose Wednesday as the local market priced in a rate hike by the central bank - a forecast that proved correct.

For the day, the Brazil C bond added 0.125 to 98.375 bid while the bond due 2040 was up 0.20 to 109.30 bid.

After the market closed Wednesday, the bank raised its benchmark lending rate to 16¼% in a move intended to stave off rising inflation.

The board voted 5 to 3 for the hike, with dissenting members calling for an even bigger increase of 50 basis points.

"The [Brazil] market had quite a strong day yesterday [Tuesday]. Also the equity market was higher. The locals support an interest increase of 25 to 50 basis points," said a Latin American debt strategist at Refco EM ahead of the bank action.

And Latin America in general is following the direction of Brazil, said the Refco strategist.

"You had a little bit of activity in Venezuela due to oil prices." Colombia, Ecuador and to an extent Mexico performed well, he added.

Looking ahead, the market will experience some short-term volatility in response to increases in U.S. interest rates, according to the strategist.

"That could put some pressure on prices in emerging markets. Over the medium and long term, I think the fundamentals of the countries - in this case, the ones related to oil production - have improved.

"They have shown that balance of payments are positive. They are showing surpluses," he added.

"Reserves are also getting higher, so it's a positive environment for emerging markets."

Too much supply?

Meanwhile some investors are wondering if the current levels of emerging markets debt are at risk with so much impending issuances in the pipeline.

The market initially was softer last week as new paper came in from the Philippines, Brazil and Petrobras.

The pace of new deals has continued this week, with issuers including El Salvador with $286 million and Colombia and Telekom Malaysia with $500 million each.

But the market appeared to have quickly shrugged off any supply concerns, according to a sell-side source.

"We're running into a period where we have a fairly large calendar of coupon payments coming up, both principal and interest," said the source.

"And that's going to put a lot of cash into investors' hands.

"Brazil has the biggest payments in October. April and October are always a big month for Brazilian payments and you have others as well.

"So there's a lot of cash coming from that standpoint."

Furthermore, there are investment inflows coming in from different mandates, according to the source.

"So I think the sense is that as long as the market backdrop stays constructive, that it's going to be okay."

And the source added that new Asian securities do little to over-saturate the market.

"Names like China and Korea are pretty much on the periphery in our market," noted the source. "It's not central to the emerging markets. I mean Korea is not even in the EMBI.

"Obviously it cuts across a lot of different investor groups," said the source. And the impact of Asian deals is far less than other issuances.

"If a Korean deal came and did poorly for whatever reason you wouldn't nearly have the impact on the market that Brazil deal would have," concluded the source.

Russian paper not impacted by Putin's orders

In general, Russian paper has not been impacted by the sweeping changes to the political system ordered by president Vladimir Putin, which give more power to the Kremlin.

"It's a pretty core issue. Anyone who has been watching Russia should not be entirely surprised by it," said the sell-side source.

"But people pay more attention to the fact that the shareowner thing at Gazprom was being liberalized.

"If oil prices were at $20, I guess people would be a lot more worried about it than they are with oil prices at $45," added the source.

However, for the day, the Russian bond due 2030 was slightly down 0.063 to 96.062 bid.

Reg S deals popualr

The emerging market pipeline is robust with the deals from Asia and Eastern Europe. The catch is that many of them are formatted as Regulation S, which sidelines a significant proportion of investors.

"It's just a lot of those issuers don't naturally have their Rule 144A disclosure," added the sell-side source. "There is a different level of disclosure that you do for Reg. S versus 144A.

"The 144A is more rigorous. It takes longer and it's more expensive.

"So issuers just say that if my needs are limited enough, I can meet them with offshore demand.

"I don't need to go through that extra expense, time and trouble of 144A."

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