Brazil down on Lula's defeat in the lower house; Pemex sells €1 billion 20-year bonds

By Reshmi Basu and Paul A. Harris

New York, Feb. 15 - Brazilian paper slid on news of a startling defeat to the president Luiz Inacio Lula da Silva's government Tuesday, while in the primary Mexico's Pemex tapped the euro market for €1 billion of 20-year bonds.

Politics brought down Brazilian paper Tuesday as Lula suffered a blow. The lower house snubbed his Workers' Party by electing Severino Cavalcanti from the center-right Progressive Party as its president.

"I think it was surprising first of all," said a buyside source. "I wouldn't jump to conclusions just for this one occurrence. But I think it's something to watch.

"It just proves that PT hasn't really been able to have a dialogue with other parties and try to reach a common denominator with them.

"It's definitely a negative surprise. I won't call it concerning yet," said the source,

During the session, Brazilian paper was spooked, fearing that this potentially could mean that Lula may lose some of his bargaining power moving ahead.

During the session, the Brazil C bond was down a quarter of a point to 102½ bid while the bond due 2040 slipped 0.90 to 117.50 bid.

Additionally, emerging markets were also softer on weaker U.S. Treasuries, according to a trader. The yield on the 10-year note rose to 4.10% from 4.08% at Monday's close.

"Prices went down. Treasuries were hit today [Tuesday]. But most of it was based off of Brazil today [Tuesday]," he said.

In light volume, there was some local selling ignited by the news out of Brazil, remarked the trader.

Other losers Tuesday included Mexico, Ecuador and Venezuela. The Mexico bond due 2009 was down 0.15 to 121.40 bid. The Ecuador bond due 2040 lost a point to 93½ bid. The Venezuela bond due 2027 fell 0.65 to 102.60 bid.

Pemex sells €1 billion

A day ahead of Federal Reserve chairman Alan Greenspan's testimony, Petroleos Mexicanos tapped the long end of the euro market.

The state-run oil company priced €1 billion 20-year bonds (Baa1/BBB) at an issue price of 99.086 for a spread of mid-swaps plus 160 basis points via Barclays Capital and Deutsche Bank.

"The Pemex euro deal has gone well, which is not surprising. Demand for euros, in deals like that, is pretty strong right now," said a sellside source.

The once simmering new issuance pipeline has now cooled off, as issuers are strategically holding off, given that the next two next weeks are choked with non-issuer friendly events, said the sellside source.

"In general everybody is waiting for Greenspan. And then we have an early close on Friday. So Thursday is the only day someone could sneak in with something.

"People are not likely to want to be out there over a three-day weekend with a deal splashing around," said the source.

Then next Wednesday is the Federal Open Market Committee meeting.

"There are windows here and there where people can do things, but in general I think the next two weeks will be relatively quiet for emerging markets, just because you had so much issuance in January."

Philippines dips on bomb news

Philippines' debt fell initially on news of a rash of bombs Monday but subsequently was able to retrace some of its losses.

The attacks killed at least 11 people and wounded nearly 130. Muslim extremist group Abu Sayyaf claimed responsibility for the bombings.

The country's paper has not been actively trading, according to another trader.

"After the news, the market was a little softer. But then bids came back towards the afternoon and the market was lifted," said the trader.

The Philippines 9½% due May 2030 was 101¼ bid, 101¾ offered on Tuesday, having eased from 101½ bid, 102¼ offered on Friday. The bond is softer by a quarter to three-eighths.

"In general, the Philippines bonds continue to trade pretty well, considering where it had widened to at some points," said the sellside source.

"The Philippines is trading sort of flat to Venezuela, and about three-eighths behind Brazil. At some points it was a lot wider than that.

"Overall they are doing a lot better. Of course they are still going to have to come with more supply before they are finished for the year," remarked the sellside source.

Looking at Greenspan

Both the Treasury and emerging markets will scrutinize Greenspan's congressional testimony as it looks for clues as to the direction and timetable of Federal interest rate hikes.

"The bigger question is not whether the Fed is going to do 25 basis points in each of the next few meetings, but whether they will stop in the fall or keep going," said the sellside source.

Plus the markets want to know whether the hikes will continue in 2006, noted the source.

"One of our economists said that that is presently the issue in the market.

"If you look at Fed Funds futures it has the Fed stopping: it gets to 3.35% by September, and then 3.50% from the end of the year on out.

"So the market seems to think that the Fed just raises a couple of more times, and then they are done," remarked the source.

However, the sellside source disagrees, expecting the Fed to move rates to 4¼% by the end of this year and continuing beyond that.

"If you have the view that the Fed stops at 3.50%, and that from then on the Fed's policy will be neutral, then you can have an outlook where the 10-year Treasury is in the mid 4% range.

"But if you think the Fed is going to keep going and ends the year at 4.25%, and keeps going beyond that, then your 10-year Treasury forecast has to be a fair amount wider.

"I think the market is pricing in the benign, slow-and-easy Fed, stopping out around the 3.50% level. It does not seem to be pricing in something substantially worse than that," commented the source.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.