Emerging debt-Brazil hovers steady after strong rally

www.forbes.com Reuters, 03.07.03, 1:29 PM ET By Susan Schneider NEW YORK, March 7 (Reuters) - Brazilian sovereign bonds held steady on Friday after this week's weighty 3 percent jump, as investors remained sanguine about the new government's economic policies, but hesitated to take big positions ahead of the weekend. Brazil's portion of J.P. Morgan's Emerging Market Bond Index Plus gained 0.26 percent in terms of daily returns as the benchmark C bond <BRAZILC=RR> lost 0.125 points to 77.125 bid. With Brazil comprising a weighty one-fifth share of the EMBI- Plus, its scant movement kept the broader market little changed on the day. The horizontal day for market bellwether Brazil came as investors digested a grim U.S. employment report and took a breather from a debt rally fueled by hopes Brazilian President Luiz Inacio Lula da Silva can stitch together support to overhaul the nation's pension and tax regimes. "We saw a little bit of reaction today from the economic number out of the U.S. There was a little bit of selling. But in general, the tone is still strong, everyone believes the whole Brazil story," said an emerging debt trader. The U.S. Labor Department said on Friday that the economy suffered its worst jobs drop since the aftermath of the Sept. 11 attacks, with a 308,000 non-farm payrolls drop in February. The plunge came as worries about a possible U.S.-led attack on Iraq prompted caution in hiring. Yet Brazil has largely shrugged off global jitters about the economic fallout of a conflict in Iraq as investors take heart from Lula's reform efforts, which analysts say are needed to shore up the nation's financial health. The country's bonds have surged nearly 17 percent so far this year. Friday's performance extended the trend as the market made little movement after U.S. President George W. Bush said he was ready to go to war even if the United Nations Security Council failed to authorize the use of force against Iraq. Emerging debt also looked past the Friday address of chief U.N. weapons inspectors Hans Blix and Mohamed ElBaradei, said traders. Blix criticized the rate at which Iraq has provided documents on banned weapons, but said there had been some acceleration in Iraq's efforts to disarm since January. "The main thing driving Brazil now is that the opposition jumped on the side of reform. That's what (former president Fernando Henrique) Cardoso tried to do for years, so if they get the politics to agree that something needs to be done on social security and tax reform, I think we'll continue to grind higher," the traded added. While Brazil's share of the EMBI-Plus was largely neutral on the day, traders said the country's bonds saw a touch of profit taking as investors locked in recent gains. "The market is looking heavy. I think there are some people trying to take advantage of this rally to lighten some positions," said another emerging debt trader. Brazil's Par bond <BRAPAR=RR>, for example, shed 0.75 points to 71 bid in midday trading and its DCB bond <BRADCB=RR> shed 0.25 points to 63.75 bid. Turkey's bonds, meanwhile, traded a tad higher as investors continued to hope parliament will reconsider last week's rejection of a U.S. request to use Turkish territory as a base for an Iraqi invasion. Turkey's share of the EMBI-Plus notched 0.28 percent higher on the day, aided by a 0.25 point increase in the benchmark dollar bond <TRGLB30=RR> to 103.5 percent of face value. The nation's bonds veered sharply lower on Monday after the parliament move, which raised concerns the nation's fragile economy would be pummeled by a war without the promise of billions of dollars in U.S. aid. But the tone has improved in recent days as investors eye clues the government may make a second attempt to pass a resolution allowing the stationing of U.S. troops. Sources in Washington said late on Thursday that Turkey could get direct U.S. loans rather than loan guarantees if it grants U.S. troops access to its bases.