Brazil flat to weak but CPI report fails to show interest rate direction; primary market active

By Reshmi Basu and Paul A. Harris

New York, March 11 - Brazilian debt prices were little moved on Thursday's consumer price index report after the indicator failed to give a clear pointed to the next interest rate move.

Prices rose 0.61% in February, down 0.15 percentage points from January's 0.76% increase, IBGE reported. It attributed the decline to lower food prices and noted school fees made up 0.31% of the increase.

Market participants said that while Thursday's CPI report indicated that Brazil's inflation rate is falling, it still remains too high for the central bank to cut its benchmark lending rate at its policy meeting next week. The bank has kept the rate at 16.5% for a second month on fears that that inflation is rising.

Bond prices were flat to slightly weaker Thursday, according to an informed source.

He saw levels for Brazil's due 2008 between 114¾ and 1153/4.

The benchmark C bonds were between 96 to 96 1/8 and the bonds due 2040 traded between 105½ and 1061/2.

"In general, prices are kind of flat to slightly weaker," said the source.

"I don't think there is a clear statement whether they will move rates in April. Given the recent information that we have, it's an interesting and complicated position that they are in. But I don't think there is a clear position on how they may act if they may wait after April or not. It's kind of a tough call."

Some participants had attributed Wednesday's decline in bond prices to worries about the inflation report.

But Mark E. Dow of MFS Investment Management said the move was because of investors generally shedding risky assets.

"It's true the benchmark was down very hard yesterday [Wednesday]," Dow said.

"But, if you look at the time Brazil bonds began to sell off yesterday, it was at about the same time the equity markets started breaking down.

"Also, locals, hedge funds in particular, tend to hedge their local equity positions by shorting Brazil dollar bonds.

"Had the inflation report been the driver, you would have expected to see greater pressure on the currency, which clearly was not the case."

New Issues in Poland, Chile

Meanwhile the new deal market was active.

Among issues pricing was a €700 million add-on from Poland. The East European country brought the tap of its 4½% notes due February 2014 at Bunds plus 61.3 basis points, the equivalent of mid-swaps plus 48 basis points.

The total size of the sovereign issue is now €3 billion

From Chile, Empresa Nacional del Petroleo priced a $150 million 10-year bond at 125 basis points over Treasuries.

The 4 7/8% notes came to market at 99.625 to yield 5.01%.

Deutsche Bank ran the books for the issue.

The Santiago, Chile oil company will use proceeds to refinance debt and for capital expenditures.

Almaty, Kazakhstan-based Bank TuranAlem sold $300 million of 10-year 8% bonds at 98.32 to yield 8 ¼% (Baa3/BB-), according to a market source.

JP Morgan and ABN Amro were bookrunners.

Looking ahead, AES Gener SA is now expected to price its $300 million of 10-year notes (Ba3/BB+/BB) on Friday instead of Thursday.

Talk on the deal is 380 basis points over Treasuries.

Deutsche Bank Securities is bookrunner.

AES Gener is a Santiago, Chile power company.

And Votorantim Celulose e Papel SA said it is requesting proposals for a $300 million 10-year bond deal, according to a market source.

The deal is expected to price during the second quarter.

Votorantim is a Sao Paolo, Brazil pulp and paper company.

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