Emerging debt-Brazil edges higher, Turkey tumbles

www.forbes.com Reuters, 03.03.03, 11:55 AM ET By Susan Schneider

NEW YORK, March 3 (Reuters) - Brazilian sovereign bonds edged higher on Monday in thin Carnival holiday trading, as investors remained sanguine about the financial health of Latin America's economic powerhouse and the reform agenda of its new president. Turkey, however, kept a lid on the broader market's gains as its bonds tumbled more than 3 percent, battered by concerns about the economic fallout of parliament's rejection of a U.S. request to station its troops in Turkish territory for a possible U.S-led military strike on Iraq. Brazil's share of the J.P. Morgan Emerging Market Bond Index Plus added 0.53 percent, building on a string of positive days that helped the bonds rack up 7.5 percent in returns last month. The nation's benchmark C bond <BRAZILC=RR> gained 0.125 points to 74.875 bid. While Brazil's markets are closed for much of the week because of the Carnival holiday, leaving the bonds without key cues on the domestic front, the bonds continued to gain ground as investors line up medium-term positions in what is likely to be a top performer for emerging markets this year, said one analyst. "If you look at the high-yielders, where's the competition? Uruguay and Venezuela are plagued by problems; their spreads (over comparable U.S. Treasuries) are very high," said Siobhan Manning, Latin American debt strategist at Italian investment bank Caboto. "Brazil is one of the best with regard to fundamentals," she said. Manning added that cash has recently flowed into Brazil as investors take profits on the sizzling performance of Russian bonds. Brazilian President Luiz Inacio Lula da Silva, in office since Jan. 1, has wooed investors with promises to keep a tight rein on the government's finances and to pursue reforms of the social security and tax regimes. Investors say the reforms are critical for Brazil to shore up its financial health. Still, a number of analysts have questioned how high Brazil's C bond can go. "This week is going to be important because 75-1/2 is a strong resistance level. But pricing will be difficult to interpret because Brazil is basically closed until Thursday," said Manning. Turkey's bonds, meanwhile, careened lower as the Saturday vote unleashed concerns that the nation's economy, still recovering from a fierce recession, would take a severe hit from an Iraqi war without any promise of U.S. aid. The approval of the U.S. troop request would have facilitated up to $30 billion in grants and loan guarantees Turkey has said it needs to compensate for the economic fallout of an Iraqi conflict. Analysts said the vote was negative on several fronts. "The vote puts the country's good relationship with the U.S. at risk and makes the fate of the $6 billion aid package uncertain, (and) the vote reduces the chances that the U.S. will force the (International Monetary Fund) to be lenient in the ongoing IMF negotiations with Turkey," said CSFB in a report. In addition, CSFB said the ruling Justice and Development Party's (AKP) divisions on the issue sent the market the signal that the party may find it difficult to govern in the future. Turkey's share of the EMBI-Plus lost 3.3 percent in terms of daily returns, underpinned by a 4.0 point slump in the nation's benchmark dollar bond <TRGLB30=RR> to 101.75 bid. Peru's bonds also slipped in Monday's session as the nation prepares to reopen its previous 12-year issue bond for up to $250 million, said traders. The nation's portion of the EMBI-Plus shed 0.42 percent on the day. On Monday, Peru's government authorized the reopening of last month's $500 million, 12-year global bond, which sold at 5.77 percentage points over the comparable 12-year U.S. Treasury with a yield of 10.10 percent and a coupon of 9-7/8. "This has hit the market a little bit," said an emerging debt trader of Peru's planned issue. The broader EMBI-Plus move a bare 0.12 percent higher on the day.