Emerging market debt moves higher as Brazil leads the way; AES Dominicana sells $160 million deal

By Reshmi Basu and Paul A. Harris

New York, Dec. 6 - Emerging market debt continued to pull ahead, led by Brazilian debt, on the back of stronger U.S. Treasuries.

In the primary market, AES Dominicana Energia Finance SA priced $160 million of 10-year bonds (/B-/B-) at par to yield 11% or a spread of 648 basis points more than Treasuries. ABN Amro was bookrunner.

The new issue saw an up-tick in the secondary, closing at 100 3/8 bid, 100¾ offered.

Meanwhile price guidance surfaced on an upcoming offering from Singapore's United Overseas Bank. The bank issued guidance of mid-swaps plus 73 to 75 basis points on its $500 million offering of hybrid tier I perpetual preferred shares (expected ratings A2/A-).

There were $1 billion of orders in the books early Tuesday morning, according to a market source.

Deutsche Bank is the global coordinator, and Credit Suisse First Boston and JP Morgan are joint lead managers for the Rule 144A/Regulation S offering.

Ecuador to price Wednesday

Also coming up, Ecuador is expected to price Wednesday a benchmark-sized offering of dollar-denominated 10-year bullets via Deutsche Bank and JP Morgan. The issue has been talked at 10½% to 10¾%.

"I would label the sale of the Ecuadorian bonds as speculative investment by cash-rich investors looking for some opportunities to invest money that is sitting in the money market," remarked Alberto Bernal, associate director of fixed income research at Bear Stearns & Co.

"The other issue that needs to be taken into account here is that many accounts are underweight in Ecuador and they may be interested in reducing that underweight," he added.

Even as U.S. interest rates are expected to move higher, Ecuador's bonds would give a much higher return, paying a 10½% to 10¾% yield to investors.

"It makes sense to have some exposure on that degree of return," he observed.

Separately, there have been reports that Venezuela could buy $300 million of the new issue. The size of the issue is expected to be $750 million.

That has helped Ecuador gain, said a trader. The Ecuador bond due 2011 added ¾ point to 101½ bid, 102½ offered while the bond due 2030 moved up 0.35 to 93 bid, 93 ½ offered.

EM surges on tame U.S. economic data

Emerging markets debt gathered more strength Tuesday in response to stronger U.S. Treasuries. Treasuries saw a sharp gain after a report showed downward revisions to labor costs in the third quarter.

In late trade, the yield on the 10-year note stood at 4.49%, lower from Monday's 4.59%.

Emerging markets opened the session firmer with Brazil leading the way. Firmer Treasuries coupled with a stronger Brazilian real and gains in U.S. equities resulted in a short squeeze across the board, said a source.

During the session, the Brazilian bond due 2040 added 1.70 to 126 bid, 126¼ offered.

Elsewhere, Peruvian bonds were slumping on technicals. Last week's announcement of new supply is putting pressure on its bonds, according to the source.

Moving to Venezuela, the source also noted that there has been some selling by the local market of the country's new issue, which is wearing on the country's curve. Last week, the country sold an upsized offering of $3 billion in domestic bonds maturing in 2016 and 2020 (B2/B+/BB-).

Nonetheless in late trading, the new bonds were spotted higher. The bonds due 2016 were quoted at 87¾% bid, 88¼ offered, up 1¼ points on the session. The bonds due 2020 were spotted at 85.20 bid, 85.70 offered, up 0.95.

During the session, the Venezuela bond due 2027 added 0.90 to 116.85 bid, 117 offered.

Inside Brazil

From the fundamental side, news coming out of Brazil has been weak. Brazil's ability to move higher is hence somewhat unexpected, remarked Bernal.

"Growth was definitely a disappointment. Industrial production continues to disappoint as well. And the central bank is following policies that are being labeled by people on the street as extremely conservative - perhaps at a time when the economy appears to need some room to breathe."

Moreover, the political front continues to be testy. Yet, the benchmark Brazilian bond due 2040 easily crossed the 125 handle on Tuesday, noted Bernal.

A yield of 7.28% for the 2040 bond is viewed as a good deal for Brazil, "so that's the dichotomy," said Bernal, "because we are not seeing necessarily good news on the endogenous front."

Nonetheless, Brazil is finding support even as the fundamental story is showing cracks.

"The link here is very good liquidity in the world financial markets and the expectation that from the fundamental point of view, 2006 will be a much better year than 2005, " he noted.

Brazil is also being pulled higher by the carry trade, Bernal observed.

"There's a carry trade, especially in the local markets. NDFs [Non-deliverable forwards] in Brazil continue to pay you very decent returns."

For instance, Bernal notes that a one-year NDF is paying around 12%, he added.

"The 12% is way lower compared to the 20% that we saw a few months ago, but it is still quite a decent return."

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