Emerging debt-Brazil zooms higher as reform cheer endures

Reuters, 04.01.03, 12:25 PM ET By Susan Schneider NEW YORK, April 1 (Reuters) - Brazil's sovereign bonds swooped higher on Tuesday, building on a heady 20 percent return carved out in the first quarter, as the new government's promised reforms of the pension and tax systems lured investors searching for high-yielding assets. Brazil's share of J.P. Morgan's Emerging Market Bond Index Plus jumped 1.39 percent on the day, underpinned by a 1.5 point gain in the benchmark C bond <BRAZILC=RR> to 80.5 bid. Brazil's spreads over comparable U.S. Treasuries -- the premium investors demand to compensate for risk -- narrowed 40 basis points to 1,008, or 10.08 percentage points. Investors have poured a steady stream of funds into Brazilian bonds in recent weeks on optimism that President Luiz Inacio Lula da Silva can patch together Congressional approval for the key reforms, which are seen as crucial if Latin America's largest economy wants to improve its fiscal health. "At this point, Brazil is one of the few places where investors can find high yield in fixed income," said Ricardo Amorim, head of Latin American research at research firm IDEAGlobal. " A continued rally "will basically depend on how well the reforms go. If Lula is able to approve the social security reform in coming months, I would expect to see the EMBI-Plus for Brazil going below 700 (basis points)," said Amorim. Lula once struck fear in the hearts of investors because of his political inexperience and his talk of debt renegotiation in previous political campaigns. The Lula angst helped Brazilian bond spreads balloon to a massive 24 percent over U.S. Treasuries last year. The union boss-turned-president, who took office at the turn of the year, has since won over Wall Street with respected cabinet appointments, promises to keep a tight lid on spending and the reform pledges. Lula said last week he would send Congress the social security and tax overhauls this month. Brazil's bonds have also benefited from the momentum of last week's Inter-American Development Bank meeting of investors and officials in Milan, said traders. "People are coming back from the conference bulled up on optimism over Brazil," said an emerging debt trader. Brazil's neighbors also made rosy showings on Tuesday. Venezuela's share of the EMBI-Plus increased 1.48 percent on the day, while Ecuador added 1.45 percent. Oil prices, sizzling on concerns the U.S.-led invasion of Iraq will cause crude supply disruptions, have aided the bonds of both oil-producing nations, said analysts. The broader index, meanwhile, added 0.65 percent in terms of daily returns. POWELL VISIT PULLS TURKEY HIGHER Turkish bonds also hovered in positive territory after U.S. Secretary of State Colin Powell said late Monday he would visit Turkey on Wednesday, a trip that buoyed hopes the two nations can improve their strained relations. A U.S. official requesting anonymity called it a "kiss and make up" visit. Turkey's share of the EMBI-Plus added 0.54 percent on the day, with the benchmark 2030 dollar bond <TRGLB30=RR> adding 1 point to 88.875 percent of face value. Turkish-U.S. relations hit a rough patch after Turkey refused to allow Iraq-bound U.S. ground troops to use its territory. The move killed a U.S. offer of some $30 billion in aid and loans to Turkey, which needs the cash to shield its fragile economy from the financial fallout of the Iraq war. The fears about U.S.-Turkish relations and worries about the fate of the economy without U.S. aid helped shave 10.6 percent off the value of Turkey's bonds in the first quarter, according to the EMBI-Plus. (Additional reporting by Alexander Manda in London) (Reporting by Susan Schneider, Reuters Messaging: susan.schneider.reuters.com@reuters.net, tel: +1 646 223 6319)