Emerging debt-Brazil veers higher, tracking local mkts

www.forbes.com Reuters, 02.26.03, 12:08 PM ET By Susan Schneider

NEW YORK, Feb 26 (Reuters) - Brazilian sovereign bonds jumped more than 1 percent on Wednesday, bolstering the broader emerging debt market as a rising domestic stock market and a stronger currency gave investors room to overlook chronic worries about a possible U.S.-led military strike on Iraq. Brazil's benchmark C bond <BRAZILC=RR> added 0.875 point to 73.626 bid, helping to lift the nation's share of J.P. Morgan's Emerging Markets Bond Index Plus by 1.84 percent on the day. The broader index, of which Brazil comprises a weighty one-fifth, added 0.33 percent on the day. Investors took heart from a midday climb in Brazil's Bovespa index <.BVSP> and a strengthening of the real currency against the dollar, said traders. Brazil's bonds were also helped by continued hopes the nation's new president, Luiz Inacio Lula da Silva, can push his planned reforms of the pension and tax systems through Congress, said traders. The reforms are seen as critical if Lula hopes to improve the health of Brazil's finances. "I think there's just a general feeling that the opposition is going to work more closely for tax and social security reform. That's a big factor," said an emerging debt trader. On Tuesday the leader of Brazil's largest centrist party, the Brazilian Democratic Party, promised to support Lula's reform efforts. The inclusion of the PMDB in a government coalition would give Lula's Workers Party and its allies a healthy majority in Congress. Like a host of global assets, Brazil's stocks, bonds and currency have been pinched in recent weeks by concerns that a U.S.-led invasion of Iraq would spell further trouble for an already lukewarm U.S. economy. U.S. President George W. Bush sees an attack as justified because he says Iraq is producing banned weapons. Despite Brazil's solid move higher on Wednesday, some analysts said they saw limits to its upward momentum. "We probably have the debt instruments of Brazil either at the peak or close to the peak. There is a resistance for the C bond at 75, which I don't think will be broken," said Ricardo Amorim, head of Latin American research firm IDEAglobal. MEXICO BOND DEAL IN THE PIPELINE Mexican debt, meanwhile, traded unchanged ahead of Wednesday's expected sale of a $1 billion, 12-year bond. Latin America's second-largest economy is seen selling the bond at 312.5 basis points over comparable U.S. Treasuries, according to traders and investors in London. The bond has generated a flap in emerging markets because of its inclusion of so-called collective action clauses, which are aimed at easing the painful path of restructurings. The provisos allow for changes to the bond's terms with less than 100 percent approval from bondholders, which in theory would provide some breathing room to the borrower by preventing a few holdout investors from delaying a restructuring through court proceedings. Venezuela's bonds bucked the market's broader trend with a move into negative territory as concerns lingered over the fate of the economy under President Hugo Chavez. The nation's share of the EMBI-Plus slipped 0.68 percent in terms of daily returns, with the DCB bond <VENDCB=RR> sliding 0.75 point to 69.25 bid. Venezuela's economy, which contracted last year, has been further pummeled by a two-month general strike by the opposition aimed at forcing Chavez from power. Investors are also concerned that Chavez, who has made few friends on Wall Street with his anti-free market rhetoric, has gained the upper hand in the standoff with his foes since the strike petered out. On Wednesday, Merrill Lynch cut its allocation on Venezuelan sovereign bonds to underweight from neutral in its model portfolio because of concerns there is more political and financial troubleto come as the nation's non-oil economy shrinks. (Reporting by Susan Schneider; editing by Dan Grebler; Reuters Messaging: susan.schneider.reuters.com@reuters.net, tel: +1 646 223 6319)