Emerging debt-Brazil bumped higher by data, Lula optimism

reuters.com Fri February 28, 2003 12:32 PM ET By Susan Schneider

NEW YORK, Feb 28 (Reuters) - Brazilian sovereign bonds surfed nearly 1 percent higher on Friday, extending their recent rally, as a string of solid economic numbers and optimism for the newgovernment's fiscal policies eclipsed lingering jitters about a potential U.S.-led attack on Iraq.

Brazil's share of J.P. Morgan's Emerging Market Bond Index Plus notched up a return of 0.86 percent on the day, underpinned by a 0.25 point gain in the nation's benchmark C bond BRAZILC=RR to 74.5 bid. The broader EMBI-Plus gained 0.21 percent on the day.

The gains came on the back of robust January budget surplus figures and a 2002 growth rate running slightly above the previous year. The figures added to the ongoing cheer for Lula's efforts to stitch together a consensus in Congress for the overhaul of the social security and tax systems, said traders and analysts.

"Everything coming in is pretty much what the market wants to hear. We've had the primary budget surplus number and we've had the GDP number" and Lula's team is meeting its promises so far, said an emerging debt trader.

This week Brazil's government said the public sector posted a primary budget surplus of 8.46 billion reais ($2.4 billion), a sharp jump from the 5.44 billion surplus reported in the same year-earlier month. The gross domestic product, buoyed by a thriving agriculture sector, expanded 1.52 percent in 2002 compared with revised 2001 growth of 1.42 percent.

Brazil's bonds have also enjoyed a solid showing since Lula and 27 Brazilian governors pledged to work together to reform the bloated public pension and tax regimes last weekend.

"We had good news over the weekend and local investors had plenty of cash to spend. They started pushing the market up, a few guys tried to destroy it but they basically had to cover and that pushes it up higher," said another trader.

"Then guys who are underweight or at high cash levels are forced into the market because they feel they're going to miss it. It just feeds on itself," the trader said.

The strong day for Brazil came as investment bank Goldman Sachs raised its allocation of the bonds in its model portfolio to overweight. In a report, Goldman said it lifted Brazil to 1.0 percent overweight from 1.0 percent underweight thanks to the new government's push for austere fiscal policies and structural reforms.

As Brazil heads into the Carnival holiday, which starts on Saturday and runs through midday next Wednesday, traders said they were expecting volumes to be light in coming sessions.

Brazil's bonds rewarded investors with a 6.4 percent return for the month as of Thursday and a solid 12 percent on the year to date, according to the EMBI-Plus.

MEXICO STEADY IN WAKE OF BOND

Mexico also lent a positive tone to the market as its bonds moved a touch higher. The nation's share of the EMBI-Plus added 0.15 percent return on the day, a move that comes two days after the nation sold $1 billion in 12-year global bonds containing much-discussed clauses aimed at smoothing the road of a possible restructuring.

The bond included so-called action clauses, which allow for changes to a bond's terms with less than 100 percent approval from bondholders. In Mexico's case, the threshold for approval is 75 percent.

The provisos theoretically provide borrower nations with breathing room in the event of a restructuring by preventing a few holdout investors from tying up the process in court. But they had generated some worries on Wall Street as investors feared their bargaining position would be undercut.

The flap over the clauses appeared to have abated on Friday.

"It was pretty much well received," the first trader said of the bond. "They're pretty much done with their 2003 financing needs so they're using it to buy back Brady debt, so I think that's given a pretty good tone to the market."

Among other emerging economies, the debt of Venezuela, where the economy is reeling from the effects of a two-month opposition strike and the charged standoff between President Hugo Chavez and his foes, added 0.87 percent on the day.

($1=3.57 reais) (Reporting by Susan Schneider; editing by Phil Berlowitz; Reuters Messaging: susan.schneider.reuters.com@reuters.net, tel: +1 646 223 6319)