Emerging debt-Investors chase high-yielding bonds

<a href=reuters.com>Reuters Mon April 14, 2003 05:41 PM ET By Hugh Bronstein

NEW YORK, April 14 (Reuters) - Emerging market debt prices rose on Monday as a rally in U.S. stocks helped investors feel comfortable buying riskier high-yielding sovereign bonds.

With the war in Iraq apparently winding down and investors feeling less frightened about putting money to work in global markets, emerging debt rose 0.68 percent in daily returns, adding to a 9.5 percent uptick since Jan. 1.

"The credits that have a little extra yield to offer, such as Brazil and Venezuela, outperformed today while the market as a whole followed U.S. equities higher," said Christian Stracke, lead emerging markets analyst at CreditSights, a Wall Street research firm.

Benchmark Brazil C bonds BRAZILC=RR rose 1-5/8 to bid 84-7/8 while Venezuela DCB bonds VENDCB=RR gained 1-1/4 to bid 73-1/4.

"It's a continuation of the trend we've been seeing, daily rallies and the market making new highs," said Paul Masco, head of emerging market trading at Salomon Smith Barney.

"There is cash out here and expectations that there is more cash coming," Masco added.

While the Dow Jones industrial average jumped 148 points, fueled by solid earnings by big financial companies, emerging market bond spreads tightened by 18 basis points to 611 over U.S. Treasuries, according to JP Morgan's Emerging Markets Bond Index Plus.

Brazil's portion of the market tightened 48 basis points to 880 while Venezuela's tightened 46 basis points to 1,279.

Tighter spreads reflect the perception of decreased risk as measured against safe-haven U.S. Treasury bonds.

In Brazil, the market is focused on expectations that new President Luiz Inacio Lula da Silva will introduce social security and other reforms seen by Wall Street as necessary for the country to balance its mountainous debt load.

The Venezuelan economy will shrink by about 8.9 percent this year, in line with last year's contraction, while inflation will rise 35 percent, the government said on Monday, days after the International Monetary Fund issued more dire predictions.

Following a two-month national strike that crippled the country's key oil sector in December and January, the IMF last week forecast a gross domestic product contraction of 17 percent, with an inflation spike of 40 percent.

But since then the country has dramatically stepped up oil production, Venezuelan Finance Minister Tobias Nobrega said in an interview with Reuters during a visit to New York.

Inflation, Nobrega added, will be kept in check in part by the expected shrinkage in GDP.

Venezuela's annualized inflation hit 34.1 percent in March. Inflation closed 2002 at 31.2 percent, the highest level in five years and more than double the 12.3 percent recorded in 2001.

VENEZUELA'S FRACTIOUS POLITICS

Opponents of Chavez, who organized the strike, accuse him of trying to establish a Cuban-styled socialist state.

Despite the political turmoil, Stracke recommends investors take an overweight position in Venezuelan debt.

"The bonds have held up fine, even though they are lagging Brazil," Stracke said.

"I think you should stay overweight but it will take some time to be convinced that there is not another political collapse around the corner," Stracke said. "Meanwhile, the government has announced expenditure cuts that will ensure that the budget deficit is manageable."