Emerging debt-Brazil drifts, Venezuela coasts higher

www.forbes.com Reuters, 03.11.03, 12:38 PM ET By Susan Schneider NEW YORK, March 11 (Reuters) - Brazilian sovereign bonds tread water on Tuesday, mirroring the country's domestic markets, as investors awaited further news on President Luiz Inacio Lula da Silva's reforms and a likely U.S.-led war in Iraq before extending the debt's heady recent rally. Brazil's share of J.P. Morgan's Emerging Market Bond Index Plus was little changed on the day, as the country's benchmark C bond <BRAZILC=RR> notched up gains of 0.5 point to 78.75 bid. The lukewarm day by the market's heavyweight kept the broader index flat in terms of daily returns. Brazilian debt has surged 15 percent higher since the start of the year, fired by optimism on Lula's planned reforms of the onerous tax and social security regimes. But with any congressional approval of the reforms months away, investors are taking a breather, said analysts. "The higher Brazil goes, the more vulnerable it is to profit-taking," said Siobhan Manning, Latin American debt strategist at Italian investment bank Caboto. "You want to price in the fact that the Lula risk was overdone, but you don't want to assume that it's going to be smooth sailing for the reforms because it's going to be a major challenge," she said. Lula, who took office on Jan. 1, was the source of heavy investor angst last year due to fear that his political inexperience and calls in previous campaigns for debt restructuring would spell chaos for the economy. While Brazil and the broader market have largely resisted the uncertainty surrounding a looming U.S.-led invasion of Iraq, investors have been unsettled by war worries, fearing a conflict would damage an already lukewarm U.S. economy. In Brazil, doubts about its high interest rates are also creeping into the market ahead of next week's meeting of the Central Bank's Monetary Policy Committee, said a trader. In a bid to stem rising prices, Brazil's Central Bank has hiked interest rates five times in as many months to leave the benchmark Selic rate at 26.5 percent in February. "Interest rates are high and they're probably going to go up again and I think people are starting to question that policy," said the trader. "Before they were just very happy that they were fighting inflation, but if you look behind it, it's going to make it very difficult for that country to grow." VENEZUELA TREKS HIGHER Venezuelan bonds, however, bucked the broader market's performance to coast 0.4 percent higher on the day, according to the EMBI-Plus. The country's DCB bond <VENDCB=RR> underpinned the move, climbing 0.5 point to 72.5 bid. The positive move came as investors took some comfort from the continued climb in Venezuela's oil production, the backbone of an economy otherwise crippled by a fierce recession. "We're seeing the oil numbers creeping up and creeping up and that's good for the country going forward, so maybe some people are just getting in front of that trend," said the trader. Crude output levels, pummeled in recent months by a general strike staged by foes of President Hugo Chavez, are now around 2.65 million barrels per day, according to Energy and Mines Minister Rafael Ramirez. The opposition has set output levels at a lower 1.9 million bpd, although the figure still represents an increase from earlier this year. Venezuela, normally the world's fifth-largest oil exporter, was pumping more than 3.1 million bpd before the strike. Turkey's bonds, under close scrutiny because of the pivotal role the nation could play in a war in Iraq, slipped 0.46 percent on the day as investors awaited news on whether the government would resubmit a motion to parliament allowing Iraq-bound U.S. troops to use Turkish territory. The approval of the U.S. troop request would open the door to billions of dollars in U.S. aid that would shield Turkey's fragile economy from a war's financial fallout.